U.S. Manufacturing Activity Index Rose in May

U.S. Manufacturing Activity Index Rose in May

Jun 1, 2016

By Anna Louie Sussman, Wall Street Journal

Sector could be stabilizing as pressure from strong dollar eases, but some economists cite mixed signals

WASHINGTON—The manufacturing sector is showing signs of firming, another indication the economy may be on its way to stronger second-quarter growth after a weak first quarter.

The Institute for Supply Management on Wednesday said its index of manufacturing activity rose to a higher-than-expected 51.3 in May, from 50.8 in April. A reading above 50 indicates that factory activity is expanding while a reading below 50 signals contraction.

This is the third straight month the sector has been in expansionary territory, following five months in contraction. Details of the report suggest the sector is shaking off some of the factors holding it back, such as low commodity prices and a strong U.S. dollar, which makes exports more expensive for overseas buyers.

“With improving demand from ongoing gains in consumer spending and a pickup in construction, manufacturing should transition to a positive for U.S. growth over the rest of 2016,” said Gus Faucher, an economist at PNC Financial Services Group.

Several sub-indexes showed growth for multiple consecutive months. The index for new orders fell slight to 55.7 in May, but was in its fifth month of expansion. The new export orders index rose for the third straight month, a sign the drag from the strong dollar could be diminishing.

Manufacturers are “building momentum and moving past the doldrums,” said Bradley Holcomb, who oversees the ISM survey, noting he expects “continued growth for the remainder of the year.”

But some economists warned against reading too much into the report, noting that regional manufacturing surveys released earlier suggested “the manufacturing sector remains weak,” as J.P. Morgan Chase’s Daniel Silver pointed out in an analyst note.

Indeed, other sub-indexes suggest caution on the part of manufacturers. The inventories index, which measures whether factories are increasing or drawing down their supplies of raw materials, notched its 11th straight month of contraction in May. That indicates manufacturers were still reluctant to stockpile more materials until firm demand materializes.

“The headwinds constraining the economy (slow exports, limited capital spending, and cautious inventory management) continue to weigh on the manufacturing sector,” said Michael Moran, an economist at Daiwa Capital Markets America.

And employment in the sector has been contracting for six straight months.

“As far as hiring is concerned, the upturn in orders has not yet turned into an expansion of payrolls. Perhaps manufacturers are as skeptical as we are in regard to believing this jump has legs,” said Steven Blitz, chief economist at M Science.

For months, manufacturers targeting domestic consumers, such as auto producers and chemical makers, have been faring better than sectors tied to the global economy. The U.S.’s modest economic growth made it a relative bright spot in a dim global picture.

But several of manufacturing’s main headwinds appear to be fading. Oil and other commodity prices have moved higher in recent months. The dollar has weakened as Federal Reserve policy makers signaled their intent to move slowly on raising short-term interest rates. Concerns about economic growth overseas, especially in China, are less pronounced than they were at the beginning of the year, although still present.

The prices index, which measures costs of raw materials, rose 4.5 points from April, the third month of expansion. Prices were higher for a range of commodities from aluminum to steel to crude oil. Mr. Holcomb said that while manufacturers were happy to enjoy low input prices for about 18 months, “in the long-term, no one wants to deal with a deflationary environment.”

The recent rally of oil near $50 a barrel may signal light at the end of the tunnelfor manufacturers linked to the oil and gas sector. Michael Hartnett, CEO of RBC Bearings Inc., told analysts on a May earnings call that the oil and gas business “is about as low as it can go in this period,” he said, noting that other industrial businesses like military vehicles and semiconductor manufacturing were faring well.

Other signs pointed to potential stabilizing in the sector. The Fed’s industrial-production index rose in April following two months of declines, with manufacturing rising 0.3% on an uptick in production of durable goods. Orders for durable goods also saw a broad-based rise in April, the Commerce Department said in late May. A separate manufacturing gauge from data provider Markit showed production volumes declining for the first time in over six years, although the headline figure of 50.7 indicated the sector was still expanding.

Factory activity has shown mixed signals around the world. Markit said Wednesday a gauge of eurozone manufacturing activity fell to a three-month low in May, with downturns continuing in France and Greece, but nonetheless remained in expansionary territory. Factory conditions continued to deteriorate in Japan, hitting a three-year low in May, Markit said Wednesday.In China, the official measure of the manufacturing sector held at 50.1 in May, still in expansion. But a private gauge edged lower, marking the 15th straight month that index has been in contractionary territory.

But demand for durable manufactured goods like farming equipment remains depressed, thanks to weak growth in regions with commodity-driven economies. In a May earnings call, investor-relations manager Josh Jepsen of Deere & Co. said a downturn in Brazil and other commodity-dependent countries in the region was pushing down sales of farming equipment an estimated 15% to 20% for 2016. And sales in Asia are expected to be flat or slightly down, “primarily due to weakness in China,” he said.

 

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