US manufacturers appear to be hesitant to invest in orders, inventories and capital expenditures until there is relief, or at least certainty, on interest rates. PHOTO courtesy Samuel Service Centers.
The Manufacturing ISM Report On Business composite PMI reading of 48.7 percent for May indicated contraction for a second straight month, extinguishing hope that March’s expansion was the start of a growth cycle.
“The best way to describe the month was sluggish, stable, stagnant, stalled and stuck,” said Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply ManagementManufacturing Business Survey Committee.
Fiore said companies are hesitant to invest in orders, inventories and capital expenditures until there is relief, or at least certainty, on interest rates. Geopolitical tensions around the globe and the U.S. presidential campaign add to such hesitancy, he added.
“Five months into the year, the lack of a benefit from a rate cut has become a headwind,” Fiore said. “A monetary easing has not occurred, and our panelists’ companies and their customers are reluctant to make any kind of commitments until they see some kind of action.”
Fiore cited data from ISM’s Semiannual Economic Forecast from December, in which manufacturing survey respondents projected an 11.9-percent increase in capital expenditures across the sector this year. In May, that figure dropped to 1 percent.
The New Orders Index fell to 45.4 percent, its lowest level since May 2023 (42.9 percent). The Production Index (50.2 percent) has indicated resiliency amid slow demand, in big part because companies worked off order backlogs from coronavirus pandemic over-ordering. That well is drying, with the Backlog of Orders Index at 42.4 percent.
“There has likely been a plateau,” Fiore said. “I don’t see a decline yet, but with new orders slow and customers holding their order books close to the vest, if that continues, there’s not a lot of collective backlog left. At some point, that production number will have to go down, and that means a revenue decline, which leads to other factors that we’re hoping not to see.”
The Employment Index returned to expansion at 51.1 percent, ending a seven-month stay in contraction territory and the highest reading since August 2022 (54.4 percent). However, hiring remains “cautious,” Fiore said, adding that for every respondent comment on adding staff, there was one on reducing head count.
“There might have been a seasonal factor at play, with people graduating college and starting jobs,” Fiore said. “In this environment, 51 percent doesn’t feel much different than 48 percent. Given the uncertain demand, there isn’t any significant hiring activity.”
The Prices Index registered 57 percent, down 3.9 percentage points compared to April. Which commodities like fuel, natural gas, aluminum and plastics remain inflationary pressures, Fiore noted Semiannual Economic Forecast sentiment in May suggesting that manufacturing companies have already absorbed most of their projected price increases for the year.
The Inventories Index was down 0.3 percentage point to 47.9 percent, and sentiment was likely summed up in a comment from a Business Survey Committee respondent in Computer & Electronic Products: “Orders have started to rebound, but inventory levels remain high enough for no impact on our supplier orders. It will take a few more strong months before supplier orders (pick up).”
