Growth in U.S. manufacturing activity in May slowed to its weakest pace in more than two years as purchasing managers raised concerns about a trade war between the U.S. and China, according to the Institute for Supply Management. The ISM’s monthly factory index, the PMI, registered 52.1 percent in May, a 0.7 percent decrease from 52.8 percent in April.
May’s growth was softening even before the Trump administration threatened a 5 percent tariff on all goods imported from Mexico. Concerns about the U.S.-China trade war had abated in recent months, and then suddenly re-escalated.
“It appeared we were ready for all this to go away and then [a potential agreement] blew up in May,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. “About 41 percent of comments this month were tariff-related, up from 12 to 14 percent only a few months ago.”
U.S. factories reported their weakest output since August of 2016 as May’s production index dropped 1 percent to 51.3. New orders improved by a single percentage point to 52.7.
Any number above 50 indicates manufacturing is expanding; a number below 50 indicates contraction.
Purchasing managers are now contending with a tariff hike from 10 percent to 25 percent on billions of dollars’ worth of Chinese products. “The threat of additional tariffs has forced a change in our supply chain strategy," an executive in chemical products told the ISM. "We are shifting business from China to Mexico, which will not increase the number of U.S. jobs.”
Ongoing tariffs are impacting costs and influencing supplier realignment, an electronics executive told the ISM, adding that border issues were already causing delays in imports from Mexico. A 5 percent tariff would be a big deal to U.S. manufacturers, said Fiore. “If this were to happen as planned, we are talking tariffs on trillions of dollars’ worth of goods from both China and Mexico. We’re also talking about $250 billion worth of economic potential.”
Demand continued for U.S. goods in May, but remained less-than-optimum in the low 50s. “Customers’ inventories [at 43.7 percent] are too low for the 32nd consecutive month,” Fiore added “remaining below preferred levels. The index registered its highest level since April 2018, when it registered 44.3 percent. The ‘too low’ status continues to indicate future production growth potential.”
Backlog contracted for the first time since 2017, dropping 6.7 percent below 50 to 47.2. “That’s pretty alarming,” Fiore said. “These are orders that have been received but manufacturers were not able to ship for one reason or another.”
Inputs — expressed as supplier deliveries, inventories and imports — were lower this month, primarily due to inventory softening and supplier’s continuing to deliver faster, resulting in a combined 4.6-percentage point reduction in the supplier deliveries and inventories indexes.
“Overall, inputs reflect supply chains’ ability to respond faster and indicate that supply managers are closely watching inventories,” Fiore said. “This is the 39th straight month of slowing supplier deliveries, with the index indicating a period of supplier delivery improvement after four months of stability, but with higher stress. Supplier deliveries are improving, with many respondents noting more readily available supplier inventory, faster supplier response times, and generally suppliers ‘catching up’ despite land- and river-transportation bottlenecks." Imports remained flat in May
Consumption -- reflected by production and employment -- continued to expand. ISM's employment index increased 1.3 percent in May to 53.7. “The index recorded the single biggest gain of the five PMI sub-indexes,” said Fiore. Respondents reported hiring recent college graduates, increases in temporary labor to support seasonality, and in some cases, deferring hiring due to economic uncertainty.
Prices remain at a relatively stable level -- the index increased 3.2 percent to 53.2 -- although steel prices have fallen below nominal levels. U.S. tariffs on steel and aluminum were dropped, “but I’m not sure if those tariffs were dropped too late,” Fiore said. “As a rule, if steel prices are strong in the April-May time frame it’s positive for the economy. If they drop, it’s an indication that there will not be a strong GDP for the second half of the year.”
Nevertheless, comments from the panel reflect continued expanding business strength, but at softer levels consistent with the early-2016 expansion.
“Business continues to be very strong,” said a machinery manufacturer. “Our company and our supply base continue to be challenged getting manpower for production. Key commodity costs like steel have continued to come down. Lead times with suppliers have stabilized after moving out two to three times what they were a year ago. Supply base performance has improved over the last 90 days and stabilized.”
Respondents feel they have a good amount of business that they are comfortable with, Fiore concluded, “and they’re not canceling orders.”