ISM Manufacturing Index Contracts for 18th Time in Last 19 Months

The Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) fell to 48.7 in May from 49.2 in April. The latest figures keeps the index in contraction territory for a second straight month. The index has now contracted for 18 of the past 19 months. The May reading was below the forecast of 49.8.

Here is an excerpt from the latest report:

Fiore continues, “U.S. manufacturing activity continued in contraction after growing in March, the first expansion for the sector since September 2022. Demand was soft again, output was stable, and inputs stayed accommodative. Demand slowing was reflected by the (1) New Orders Index dropping deeper into contraction, supported by additional comments regarding ‘softening,’ (2) New Export Orders Index edging back into marginal expansion, (3) Backlog of Orders Index regressing lower into contraction territory, and (4) Customers’ Inventories Index at the ‘just right’ level, neutral for future production. Output (measured by the Production and Employment indexes) advanced compared to April, with a combined 1.4-percentage point upward impact on the Manufacturing PMI^® calculation. Panelists’ companies maintained production levels month over month, and head count reductions continued in May. Inputs — defined as supplier deliveries, inventories, prices and imports — continued to accommodate future demand growth. The Supplier Deliveries Index was stable, and the Inventories Index was marginally lower compared to April. The Prices Index eased but remained in strong expansion (or ‘increasing’) territory, as most commodity driven costs continue to climb but at weaker rates. Imports continued to grow, at a slower rate in May.

Here is the table of PMI components.

Background on ISM Manufacturing Index

The ISM Manufacturing Index is a diffusion index, meaning that a reading above 50 indicates expansion in the sector and a reading below 50 indicates contraction. Therefore, the latest reading of 48.7 indicates we are in contraction territory. What sort of correlation does that have with the months before the start of recessions? Check out the blue dots in the chart below. The 11 recessions during this time frame are indicated along with the index value the month before the recession starts.

The month before a recession, the index has ranged between 42.1 and 66.2 with an average of 49.7, a level we currently sit below. The current level of 48.7 is at or below 6 of the 12 recessions shown above.

Here is a closer look at the series beginning at the turn of the century.

ETFs associated with industrials and manufacturing include: First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF (VIS), and iShares U.S. Industrials ETF (IYJ).

Written by: Jennifer Nash, Author, for Advisor Perspectives.