U.S. manufacturers still in a slump, ISM shows, but inflation is easing

Numbers below 50% signal contraction in the industrial side of the economy. The last time the index was below that threshold for more than six months was between March 2008 and June 2009 — during the Great Recession.

Economists polled by the Wall Street Journal had forecast the index to register 47.0% in May.

Key details:

• The index of new orders fell 3.1 points to 42.6%, just a tick above the post-pandemic low. Demand remained at a level associated with a recession. “New orders define the future, and right now the future is very cloudy,” said Timothy Fiore, chairman of the survey.

• The production barometer rose 2.2 points to 51.1%, the first positive reading in six months.

• The employment gauge edged up 1.2 points to 51.4%. Yet Fiore said businesses might have to lay off more workers unless new orders pick up. “People are going to have to make difficult decisions in the next month or two,” he said.

• The price index, a measure of inflation, sank 9 points to 44.2% and hit the lowest level since last November. “Customers and consumers are beginning to push back” against rising prices, a food manufacturer told ISM.

Big picture: Most manufacturers aside from those associated with the auto industry have experienced softer sales and new orders due to consumers shifting more spending to services such as travel and recreation. Exports have also softened in response to slower economic growth around the world.

Manufacturers are unlikely to rebound until the Federal Reserve stops raising interest rates. Higher borrowing costs typically reduce demand for big-ticket items and raise the threat of recession.

Looking ahead: We are “seeing signs of slowing in the second half of 2023 and potentially into early 2024,” a senior executive at a maker of fabricated-metal parts told ISM.

“Although sales are slightly lower, they are holding at current rate — soft, not catastrophic,” an executive at a furniture manufacturer said.

Market reaction: The Dow Jones Industrial Average
DJIA,
+2.12%
and S&P 500
SPX,
+1.45%
fell in Thursday trades.