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ISM Manufacturing: Steady, Solid Growth

June 1, 2017

Bottom Line: Manufacturing activity continued to expand as expected, according to the ISM survey. While all the components of the survey are off their February highs, new orders rose and production remained at levels suggesting solid, if slightly decelerating, growth. And comments in the survey were mostly positive with 15 of 18 industries surveyed reporting growth. Anecdotes from they respondents included a report of tight labor conditions in the fabricated metals industry and concern from the transportation sector that "the political climate can change things quickly", despite current economic strength. Finally, raw material prices rose for the 15th month in a row -- but the price index fell sharply indicating that the pace of price increases decelerated sharply.

The ISM Manufacturing Index ROSE by 0.1 points in May to 54.9%, compared with market expectations for unchanged at 54.8% This indicates that manufacturing activity expanded during the month.

New Orders grew modestly from 57.5% to 59.5%. Meanwhile, Export Orders declined modestly. Production declined modestly from 58.6% to 57.1%. Consequently, Order Backlogs grew sharply. Inventories grew slightly from 51.0% to 51.5%. They are modestly above the average survey level for the last twelve months.

Employment grew modestly from 52.0% to 53.5%, suggesting there will be modest factory job creation in the upcoming payroll employment report.

Prices declined moderately.

Quotes from Survey:

"Sales have picked up compared to the last two months. Customer demand has increased." (Plastics & Rubber Products)

"Economy is still strong, but [the] political climate can change things very quickly." (Transportation Equipment)

"Global price increases for commodities." (Electrical Equipment, Appliances & Components)

"Business (sales/production) is steady. Pricing pressures on raw materials. Skilled labor in short supply." (Furniture & Related Products)

"Agricultural demand very strong." (Chemical Products)

"Our business is definitely paying attention to developments with the Canadian lumber tariff announcement. The final outcome could change our fiber pricing." (Paper Products)

"OEM longer lead parts possibly longer lead time due to more orders." (Nonmetallic Mineral Products)

"Business conditions are steady, and with competition increasing, it's making negotiations even more intense to reduce costs." (Machinery)

"Business is booming, and getting direct employees is increasingly difficult." (Fabricated Metal Products)

"Difficult to find qualified labor for factory positions." (Food, Beverage & Tobacco Products)

Article by Contingent Macro Advisors