June 1, 2023

The Institute for Supply Management’s index of conditions in the manufacturing sector edged lower by 0.2 point in May to 46.9 after having risen 0.8 point in April after having declined 1.4 points in March.  After falling steadily last year the index has been relatively steady in each of the first five months of this year.  A level of 50.0 is the breakeven point for expansion in the manufacturing sector, so in November of last year the manufacturing sector began to contract slightly.  While 50.0 is the breakeven point for the manufacturing sector, a level below 48.7 is generally associated with a recession for the economy as a whole.   A level of 46.9 is associated with a GDP decline of 0.6%.

Right now the service sector — which is 2/3 of the economy is expanding at a 2.7% pace.  The ISM index of conditions in the service sector for May will be released on Monday, June 5 .

So while the economy is slowing, it is not yet in danger of slipping into recession despite the results from this ISM report for the manufacturing sector.

The Institute for Supply Management Chair for the Survey Committee Timothy Fiore said, “The U.S. manufacturing sector shrank again, with the Manufacturing PMI® losing a bit of ground compared to the previous month, indicating a faster rate of contraction. The May composite index reading reflects companies continuing to manage outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period. However, there is clearly more business uncertainty in May.’

Comments from respondents include the following:

  • “Overall impact for our business is mixed. Our scientific instrumentation business continues to be weakened by lending to support capital purchasing, while services and consumables stay on track and continue to increase in some markets. Hiring has slowed in response to continued global uncertainty on inflation and unrest in Europe.” [Computer & Electronic Products]
  • “Demand continues to gain momentum due to new business pipelines finally yielding billable production. Personal care and home care are drivers.” [Chemical Products]
  • “We continue to have a strong backlog for our customer orders; however, new orders are slowing. Our supplier on-time delivery continues to be a challenge for us, and we still face price increases on a weekly basis. Labor shortages are getting better within our organization and throughout our supply chain.” [Transportation Equipment]
  • “Pricing seems to be becoming the primary focus of supply and sourcing teams, as customers and consumers are beginning to push back. While inflation is easing on some discretionary goods, high food costs persist across most categories.” [Food, Beverage & Tobacco Products]
  • “Business is returning to pre-pandemic levels. There is increased demand in commercial/government markets and reduced demand in residential/consumer markets.” [Machinery]
  • “Less volatility in customer demand from one month to six months out; seeing signs of slowing in the second half of 2023 and potentially into early 2024. Logistics, particularly from East Asia, continue to return to historical-level transit times; Europe and India remain elevated. Supply shortages are limited to select items only. Suppliers are still seeking price increases but are too late to be asking now.” [Fabricated Metal Products]
  • “Although sales are slightly lower, they are holding at current rate — soft, not catastrophic.” [Furniture & Related Products]
  • “Moderate increase in customer orders/demand, supplier deliveries improving, and raw material prices stable to soft.” [Plastics & Rubber Products]
  • “Business conditions are good, demand remains strong, and we are continuing to ramp up production to keep up.” [Miscellaneous Manufacturing]
  • “Industrial and high-tech demands are pushing out, as a slowdown is clear. This is stunting growth and currently making 2023 demand look flat to only slightly up, compared to original projections of 10-percent growth.” [Electrical Equipment, Appliances & Components]

The orders component fell 3.1 points in May to 42.6 after rising 1.4 points in April and  having declined 2.7 points in March.  The index has been below 50 for nine consecutive months which means that orders continue to decline.  They declined at a faster pace in May than in April.  Only three of the 18 manufacturing industries reported growth in new orders in May.  Fiore noted that, “New orders contraction quickened as panelists’ companies continue to experience uncertainty regarding future customer demand,”  A reading of 52.7 is generally consistent with an increase in the Census Bureau’s series on manufacturing orders thus durable goods orders are likely to decline in May.

The production component rose 2.2 points in May to 51.1after having gained 1.1 points in April and having risen 0.5 point in March. Fiore noted that, “A return to expansion in the Production Index continues to support manufacturing executives’ strategy to stretch out output during the first half of 2023, as panelists’ companies attempt to retain sufficient workers to prepare for better second-half performance. But with the large-scale contraction of backlogs and the absence of new orders, it is unclear how long companies can continue to retain workers,”.  An index level of 52.5 is generally consistent with an increase in industrial production.  Thus, industrial production is likely to decline in May.

The delivery performance of suppliers to manufacturing organizations fell 1.1 points in May to 43.5 after declining 0.2 points in April and 0.4 point in March..  This means that supplier deliveries were actually faster for the eighth straight month  The last time that survey participants registered faster delivery times was March 2009.  Fiore noted that “Panelists’ comments continue to indicate that suppliers have excess capacity to meet all of their customers’ current demand forecasts,”

The employment index rose 1.2 points in May to 51.4 after having risen 3.3 points in April after having fallen 2.2 points in March.   Fiore noted that, “For the third straight month, labor management sentiment at panelists’ companies reflects near parity between hiring and reducing staff,”  An index reading above 50.4 is generally consistent with an increase in the BLS data on manufacturing employment.

The backlog of orders plunged 5.6 points in May to 37.5 after having fallen 0.8 points in April and 2.2 points in March.  Fiore noted that “The index remains in strong contraction as factories continue to work backlogs down amid weak new order levels, resulting in more companies reporting low backlogs. The index recorded its lowest level since February 2009, when it registered 33.6 percent,”

At the same time customer inventory levels rose 0.1 point to 51.4 after having risen 2.4 points in April to 51.3 after having risen 2.0 points in March.  Fiore said that,  “Customers’ inventory levels continue in the low end of the ‘too high’ level as panelists report their companies’ customers have again signaled suppliers to deliver less material in the future. Customers’ inventories continue another month at levels likely not conducive to future output growth,”

As the orders index declined  and customer inventories rose slightly relative to the prior month, the ratio or orders to inventories fell 0.1 to 0.8 in May after having been unchanged in April after having fallen 0.1 in March.  Orders and inventories are a bit low reltive to where they were prior to the recession which, as noted above, is an indication that customer inventories are a bit too high.

The prices paid component fell 9.0 points in May to 44.2 after rising 4.0 points in April after having declined 2.1 points in March. Fiore noted that,   “Panelists’ comments support a more balanced supplier-buyer relationship, as sellers are more concerned about filling order books to support their backlogs.,”   A prices index above 52.9 is generally consistent with the Bureau of Labor Statistics PPI index for Intermediate Materials.

We expect GDP to climb at a  2.0% pace in the second quarter and at a 1.3% pace in 2023.  We do not look for a recession until early in 2024.

Stephen Slifer


Charleston, S.C.