June 5, 2019 Reading Time: 3 minutes

Surveys of purchasing managers from the Institute for Supply Management suggest support for continued economic expansion but also highlight concerns over trade policy and tariffs as well as ongoing difficulty in filling open jobs. On balance, the results are positive but suggest a highly uncertain outlook for the second half of 2019.

The ISM’s nonmanufacturing index rose to a reading of 56.9 from 55.5 in April (see top chart). The May result is the 112th consecutive reading above 50. Among the key components of the NMI, the business-activity index (equivalent to the production index in the ISM manufacturing report) was 61.2 in May, up from 59.5 in April. For May, 12 industries in the nonmanufacturing survey reported growth while 2 reported contraction.

The nonmanufacturing new-orders index came in at 58.6, up from 58.1 in April (see bottom chart). May was the 118th month with readings above 50. The new-export-orders index, a separate index that measures only orders for export, was 55.5 in May, down sharply from 57.0 in April.

The nonmanufacturing-employment index increased to 58.1 in May, versus 53.7 in April. The favorable result stands in sharp contrast to the ADP estimate of just 27,000 new private sector jobs created in May. The more-comprehensive Employment Situation report from the Bureau of Labor Statistics will be released on Friday June 7, at 8:30 a.m. The current consensus estimate for private sector job creation is 175,000 while total nonfarm jobs creation is estimated at 185,000.

Supplier deliveries, a measure of delivery times for suppliers to non-manufacturers, came in at 49.5, down from 50.5 in April. It suggests suppliers shortened lead times in delivering supplies to non-manufacturers. May was the first decline in lead times since December 2015.

The price index fell to a reading of 55.4 in May versus 55.7 in the prior month. May was the 24th month in a row that the prices index has been above 50. This result suggests non-manufacturers are still experiencing materials-costs increases.

The manufacturing PMI composite index registered a 52.1 percent reading in May, down 0.7 points from 52.8 in April (see top chart). May is the 33rd month in a row above the neutral 50 level and the 121st above the 42.9 percent threshold consistent with expansion in the overall economy. However, it is also the lowest reading since October 2016.

Among the key components of the Purchasing Managers Index, the New Orders Index rose to 52.7 from 51.7 in April (see bottom chart). The result was the 41st consecutive month with readings above 50. New export orders ticked up slightly, gaining 1.0 point to 51.0. The backlog of unfilled orders fell 5.5 points to 47.2 versus 53.9 in the prior month, suggesting backlogs contracted. The backlogs index was at its lowest level since October 2016.

The production index was at 51.3 percent in May, down from 52.3 in April. May marks the 33rd month in a row above 50. Historically, readings above 51.7 are consistent with growth in the industrial-production index from the Fed. In May, 11 industries surveyed reported growth while 4 reported a decrease in production.

The employment index rose to 53.7 percent in May, up from 52.4 in April. Eleven industries reported gains in employment in May while just two reported declines.

Supplier deliveries, a measure of delivery times from suppliers to manufacturers, came in at 52.0, down from 54.6 in April. May was the 39th consecutive month above 50, and the results suggest suppliers delivering to manufacturers are still falling behind but at a somewhat slower pace.

The prices index rose in May, increasing 3.2 percentage points to 53.2 in May from 50.0 in April. The survey noted several comments from respondents that specifically mentioned tariffs as sources of concern for either input costs or supply chains or both.

Customer inventories in May are still considered too low, with the index rising to 43.7 from 42.6 in the prior month (index results below 50 indicate customers’ inventories are too low). This index has been below 50 for 32 consecutive months.

This month’s reports from the Institute for Supply Management suggest a bit of a rebound for the nonmanufacturing sector but a bit of a deceleration for manufacturing. However, on balance, most of the component indexes are above the neutral 50 level. Comments from the respondents suggest that industries within manufacturing and nonmanufacturing are mostly concerned with trade policy and escalating tariffs as well as the difficulty in finding qualified labor, but the general message is continued expansion for the economy.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals.

Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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