Summary
Earlier today, the Institute for Supply Management reported that its index measuring the economy's manufacturing activity fell during May, marking the sixth consecutive month of declines. Overall, today's report showed some unmistakable signs of weakness.
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The Institute for Supply Management reported earlier today that its index measuring the economy's May manufacturing activity ("PMI") came in at a reading of 51.4, down from April's 53.3. The May result was weaker than a consensus forecast that was looking for something a bit over 52.0, and there were also declines in some of the index's more important components.
The PMI and its components are configured such that readings above 50.0 indicate sector expansion. Readings below 50.0 are consistent with contraction.
The May results for some of the index's key components, with April 2005 results in parentheses and May 2004 results in brackets were: Employment 48.8 (52.3) [60.6], production 54.9 (56.7) [65.1], new orders 51.7 (53.7) [63.9] and backlog of orders 51.0 (53.0).
May's drop marked the sixth consecutive month of declines in the PMI, with the 51.4 reading standing well below the index's most recent peak, which was 62.8 in January of 2004. Moreover, the 48.8 reading for the employment component marked the first time in 18 months in which this critical area failed to grow.
The latest data also indicated a substantial easing in price pressures. The 58.0 reading for the price component was down a sharp 13.0 points from April's 71.0, although it also marked the 39th consecutive month of rising prices. May of 2003 was the most recent trough in this series, when it stood at 51.5.
If firms are passing these higher prices along, it is contributing to inflationary pressures. And if they are not able to pass them along, rising prices are contributing to a squeeze on profit margins.
Over recent months, there is growing indication that companies have gained some pricing power, so the situation at present may actually represent the worst of two worlds: (1) Higher prices that are being passed along that are adding to overall inflationary pressures, but (2) the inability to pass along all price increases, thereby creating margin pressures, too.
ISM announced that 32% of its survey respondents reported higher prices during May, while 16% reported lower ones. This compared with respective April results of 52% and 10%. In August 2003, the recent trough, these numbers were 19%/13%.
To illustrate how the numbers have been trending, the following table examines overall and price data over the last 29 months. The section following the table breaks out specific commodities that were up and down in price, or were in short supply during May, as reported to ISM by its survey respondents.
(NOTE: All data below incorporate the latest US Department of Commerce seasonal-adjustment factors used by ISM. In its manufacturing index, ISM does not seasonally adjust the price component.)
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INSTITUTE FOR SUPPLY MANAGEMENT PMI INDEX
-- TOTAL INDEX AND PRICE COMPONENT
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Respondents Reporting
Higher, Lower, or
Unchanged Prices
Month/ Overall Price ---------------------
Year Index Index Higher Lower Unch.
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05/05 51.4 58.0 32% 16% 52%
04/05 53.3 71.0 52% 10% 38%
03/05 55.2 73.0 51% 5% 44%
02/05 55.3 65.5 38% 7% 55%
01/05 56.4 69.0 45% 7% 48%
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12/04 57.3 72.0 52% 8% 40%
11/04 57.6 74.0 55% 7% 38%
10/04 57.5 78.5 61% 4% 35%
09/04 59.1 76.0 55% 3% 42%
08/04 59.6 81.5 67% 4% 29%
07/04 61.6 77.0 58% 4% 38%
06/04 61.2 81.0 66% 4% 30%
05/04 62.6 86.0 74% 2% 24%
04/04 62.3 88.0 77% 1% 22%
03/04 62.3 86.0 73% 1% 26%
02/04 62.1 81.5 65% 2% 33%
01/04 62.8 75.5 54% 3% 43%
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12/03 62.1 66.0 37% 5% 58%
11/03 61.3 64.0 33% 5% 62%
10/03 57.7 58.5 26% 9% 65%
09/03 55.1 56.0 21% 9% 70%
08/03 55.6 53.0 19% 13% 68%
07/03 52.5 53.0 21% 15% 64%
06/03 50.4 56.5 26% 13% 61%
05/03 49.8 51.5 21% 18% 61%
04/03 46.1 63.5 37% 10% 53%
03/03 46.4 70.0 47% 7% 46%
02/03 49.9 65.5 <------ NA ------>
01/03 52.8 57.5 <------ NA ------>
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Commodities Reported in Short Supply During May:
(NOTE: The number of consecutive months the commodity is listed is indicated after each item.)
Caustic Soda (4); Stainless Steel; and Steel (17).
Commodities Reported Up in Price During May:
Aluminum (19); Aluminum Extrusions* (2); Caustic Soda (13); Chemicals (16); Corrugated Containers (16); Diesel Fuel (9); Energy (4); Fuel (4); Fuel Surcharges; Natural Gas* (34); Newsprint; Nickel; Oil; Petroleum-Based Products (3); Plastic Resin (4); Plastics (10); Resins (10); Stainless Steel; and Steel* (20).
Commodities Reported Down in Price During May:
Aluminum Coils; Aluminum Extrusions*; Ferrous Scrap; Natural Gas*; Steel* (3); Steel, Cold-Rolled; Steel, Hot-Rolled; and Steel Scrap.
*Reported as both up and down in price.
On Friday (6/3), ISM will report on the May results for its service-sector index.
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