U.S. manufacturing activity improved in May after falling to its lowest level in 11 years. The Institute for Supply Management’s factory index, the PMI, increased 1.6 percent in May to 43.1 from a 41.5 reading the prior month.
The industry is still in contraction – any number below 50 indicates activity is shrinking – but at a slower trajectory. Orders, production and factory employment edged up from April’s dramatic single-month decline as the nation guardedly re-opens.
Still, three months into the coronavirus disruption, two-thirds of domestic procurement managers remain cautious of the near-term outlook. Demand remains uncertain, likely impacting inventories, customer inventories, employment, imports and backlog of orders.
“I think we’ve seen the bottom of the toboggan run,” said Tim Fiore, chair of the ISM’s manufacturing survey committee. “Now, it’s all about transitioning and reopening.”
New orders increased 4.7 percent to 31.8; production grew 5.7 percent to 33.2; and employment ticked up 4.6 percent to 32.1. Still, there’s no sign of true demand, Fiore said.
New orders contracted, pushed by export order shrinkage. Customer inventory levels – at 46.2 -- are positive for future production but are still considered too low.
“Customers don’t want inventory,” Fiore said. “There were a few positive signs this month but new orders remain weak, export orders aren’t there, and backlog remains low in spite of almost no production.”
Overall, supplier deliveries, inventories and imports strengthened in May as delivery issues were partially offset by continuing imports sluggishness. The delivery issues were the result of disruptions in domestic and global supply chains, driven primarily by supplier plant shutdowns. Inventory expanded due to issues with throughput and demand weakness.
The electronics sector improved in May but remains well below 50. “Despite the Covid-19 issues, we are seeing an increase of quoting activity,” an electronics executive said. “This has not turned into orders yet, but it is a positive sign.”
Although factories are reopening, Fiore said floor space is limited due to social distancing. That’s impacting the rate of production, said a transportation executive.
Some automotive companies are supporting three shifts, Fiore said, but not because of demand. “They can produce what they need to produce with limited floor space and employment, and they have to produce something. The real question is the level of demand.”
Supply chain constraints linger as suppliers develop their own safe workspace and factories are unable to get some of the parts they need. China’s supplies were loosening up prior to a new round of trade restrictions but a rebound in the EU looks unlikely. “The coronavirus devastated Europe,” Fiore said. U.S. imports have been low for four months and exports have been weak since March. The manufacturing sector’s return-to-work was not indicated in May’s employment levels.
For the U.S., May was a transition month, and demand, output and employment should return to some extent in June, he said. However, demand remains uncertain, which will impact inventory, employment, imports and backlog. Only six out of the ISM’s 18 manufacturing sectors reported growth in May.
"Again, the big question is consumption,” said Fiore. “What is a realistic output given demand?”
June is the real test and a better indicator of what Q3 and Q4 will look like, Fiore concluded. “If demand improves because people are going back to work and are comfortable spending their money, then we’ll have the beginning of a recovery.”