Source: Economics Group of Wells Fargo Bank, N.A.
Summary
The ISM Manufacturing index slid for the second-straight month amid a sharp pullback in new orders. There was a pickup in hiring but only some relief from prices paid, leaving the overall sector constrained.
Price Pressure Despite Soft Activity
The 48.7 reading for the May ISM manufacturing index represents the second-straight monthly decline and the second-lowest reading so far in 2024. The ISM manufacturing index has been in expansion territory just once in the past 19 months.
That is not to say that nothing is going right. The production component is still in expansion, if only barely so at 50.2, and, as we describe in greater detail below, the employment component notched a two and a half point gain. Trade also looks somewhat decent with both import orders and export orders in expansion territory. But that is the extent of the good news.
Pricing pressure abated modestly with the prices paid measure coming down to 57.0 in May. That’s down slightly from April but still higher than at any point since the scorching-hot price environment that was the summer of 2022. The fact that prices remain high amid contraction in so many other areas is a pickle for the Federal Reserve. Higher rates have had the intended effect of slowing activity without the benefit of a major cooling-off in prices. Add in the uncertainty of the fall election and firms are stuck between a rock and a hard place as evident in this response from the machinery space: “Inflation continues to be a problem with pricing of raw material and interest rates. We expect a flat rest of calendar year 2024, especially given that it’s a presidential election year.”