PMI in May Drops to Lowest since September 2009
May survey data signalled only a marginal improvement in the health of the U.S. manufacturing sector. The headline PMI fell to its lowest level since September 2009 as output growth eased and new orders fell for the first time since August 2009. Weak demand conditions and ongoing trade tensions led firms to express the joint-lowest degree of confidence regarding future output growth since data on the outlook were first collected in mid-2012. At the same time, employment rose at the slowest rate since March 2017 and backlogs of work were unchanged. Meanwhile, inflationary pressures eased further, with both input costs and output prices increasing at softer rates.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.5 in May, down from 52.6 in April. The latest headline figure signalled only a slight improvement in operating conditions, with the latest reading the lowest since September 2009. The data for the second quarter so far have indicated a distinct slowdown in the manufacturing sector compared to the first three months of 2019.
A key factor weighing on the headline reading was the softest expansion of output since June 2016. May data signalled only a marginal rise in production that was often linked to clearing backlogs of previously-placed orders.
At the same time, manufacturers signalled the first decline in new orders since August 2009. Though only fractional, survey respondents stated that weak client demand drove the fall. Some firms also noted that customers were postponing orders due to growing uncertainty about the outlook. Similarly, new business from abroad contracted for the first time since July 2018, albeit at a marginal rate.
Consequently, manufacturers exhibited a lower degree of confidence towards output over the coming year. Expectations for growth dipped to their joint-lowest since the series began in July 2012, as firms highlighted concerns surrounding ongoing trade tensions and a growing trend of customers postponing new orders, especially among large clients.
On the price front, cost burdens increased at only a modest rate in May. The rise was the slowest since July 2017, with reports of tariffs driving costs higher being countered by increased competition among suppliers. Subsequently, firms increased their factory gate charges only marginally amid efforts to remain competitive.
Meanwhile, firms signalled a further increase in employment in May. The upturn was commonly linked to the replacement of voluntary leavers and retirees. Nonetheless, the expansion was the slowest since March 2017 amid tight labour market conditions.
Finally, purchasing activity was broadly unchanged in May as firms indicated greater efforts to use current inventories for production and increased efforts to readjust stock levels in light of softer demand conditions.
Commenting on the PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
"May saw US manufacturers endure the toughest month in nearly ten years, with the headline PMI down to its lowest since the height of the global financial crisis. New orders are falling at a rate not seen since 2009, causing increasing numbers of firms to cut production and employment. At current levels, the survey is consistent with the official measure of manufacturing output falling at an increased rate in the second quarter, meaning production is set to act as a further drag on GDP, with factory payroll numbers likewise in decline.
“While tariffs were widely reported as having dampened demand and pushed costs higher, both producers and their suppliers often reported the need to hold selling prices lower amid lacklustre demand. While this bodes well for inflation, profit margins are clearly being squeezed as a result.
“With future optimism sliding sharply lower in May, risks to near-term growth have shifted further to the downside.
“While companies of all sizes are struggling, the biggest change since the strong growth seen late last year is a deteriorating performance among larger companies, where surging order book growth just a few months ago has now turned into contraction, the first such decline seen in the series’ ten-year history.”
U.S. manufacturers registered a notable slowdown in production growth in May, with the pace of expansion easing to a marginal rate. The rise was the smallest since June 2016, with firms often stating that demand conditions had softened. Increased output was generally linked to efforts to clear backlogs amid a lack of new work.
The seasonally adjusted New Orders Index posted below the crucial 50.0 no change mark for the first time since August 2009 in May to signal a decrease in new business received by manufacturers. Panellists commonly attributed the decline to softer client demand, with some customers postponing orders. Although the contraction was only fractional, it indicated a notable turnaround from April's solid upturn.
New Export Orders
New export orders received by goods producers fell in May. Though marginal, the decrease in new business from abroad was the first since July 2018. That said, the fall was the quickest since April 2016. Anecdotal evidence indicated that weaker client demand drove the contraction, with economic and political uncertainty dampening order growth.
Backlogs of Work
Backlogs of work at manufacturers were unchanged in May, following a solid expansion in April. Where a rise was reported, panellists linked this to ongoing inflows of new work. Others, however, stated that a slowdown in demand had allowed existing orders to be processed in a more timely manner.
Stocks of Finished Goods
Adjusted for seasonal factors, the Stocks of Finished Goods Index signalled a marginal decline in post-production inventories in May. Panellists suggested the fall was often due to deliberate efforts to deplete stocks following a slowdown in client demand. Though only slight, the renewed decrease in stock levels was the largest since last December.
Employment across the manufacturing sector continued to increase in May, despite softer output growth. Anecdotal evidence stated that larger workforce numbers were linked to the replacement of voluntary leavers and retirees. Nevertheless, the rise in staffing levels was the slowest since March 2017.
In line with the trend for input costs, average prices charged by manufacturers increased at a softer pace in May. Notably, the rate of inflation was the slowest since November 2016, with some firms suggesting efforts to remain competitive had restricted their overall pricing power.
Input prices increased modestly in May, with the rate of inflation easing for the seventh successive month. Where a rise was reported, panellists linked this to the ongoing impact of tariffs and higher supplier prices. The pace of inflation was however the slowest since July 2017, with around 84% of survey respondents registering no change in cost burdens. Some firms noted that a moderation in steel prices had relieved pressure on cost burdens.
Suppliers’ Delivery Times
Adjusted for seasonal factors, the Suppliers' Delivery Times Index signalled a further deterioration in vendor performance across the manufacturing sector in May. Delays were often linked by panellists to shortages at suppliers. Nonetheless, lead times lengthened at a marginal rate that was the least marked since the current sequence of deterioration began in January 2017.
Quantity of Purchases
Purchasing activity across the manufacturing sector continued to increase in May, albeit merely fractionally. Although some firms stated that the rise was due to greater production requirements, others had reduced their input buying due to lower new order volumes and efforts to clear inventories. Furthermore, the expansion was the slowest since the current sequence of growth began in May 2016.
Stocks of Purchases
Pre-production inventories at goods producers declined for the first time for two years in May. Although only slight, the contraction was attributed to efforts to reduce stock levels due to softer demand conditions.
Output expectations across the manufacturing sector remained historically subdued in May. Moreover, the degree of confidence regarding production over the coming year was the joint-lowest in the series history (since July 2012), as firms highlighted concerns that included the prospect of further tariffs, reduced new orders from large customers and softer overall demand conditions.