US: Manufacturing growth unexpectedly stronger

The ISM manufacturing index rose to 56.1 in May from 55.4 in April. Readings above 50 indicate enlargement. The figure beat economist estimates with a median projection of 54.5. Manufacturing activity unexpectedly rose in May as new orders and production growth accelerated, suggesting that underlying demand is firm.

If we look at the sub-items; Details of the ISM index also point to ongoing capacity constraints related to labor, shipping delays and material shortages. ISM’s factory employment measure fell from 50.9 to 49.6, dragging into contraction territory for the first time since November 2020, and the delivery performance indicator remained high despite some decline. The ISM index of new orders at factories reached a three-month high of 55.1, while the production indicator rose more modestly. Accumulations have also increased. Average lead times for capital expenditures rose to 178 days, the highest level until 1987. Production materials lead times fell from a record 100 days a month ago to 99 days.

The customer stock indicator showed that stocks contracted at the fastest rate in three months. This can help address concerns about excess inventory at some retailers, as well as explain the receipt of orders to manufacturers. The ISM index of factory inventories rose to its highest level since November as purchasing managers try to ensure their firms still have enough finished goods in a challenging logistics environment. The measure of prices paid by producers fell to 82.2 from 84.6 the previous month, but is historically high. Prices of some other commodities such as aluminum and steel softened as the costs of crude oil and petroleum products continued to rise. The ISM production indicator remains in the expansion zone. Renewed supply chain fluctuations following the Covid lockdowns in China could prolong delivery delays.

The JOLTS survey showed that there were 11.4 million job postings in the US at the end of April. That’s a drop from March’s record high of 11.8 million job postings, but in line with estimates. The data show that labor demand remains very healthy at the start of the second quarter of 2022, as evidenced by the fact that there is currently quite a lot of one job opening per unemployed person in the US.

If we look at the Fed’s point of view; The fact that the inflation pressure is still quite high gives sufficient reasons for an interest rate hike. At the same time, manufacturing activity is still in the strong growth zone, which would support the view that the economy is not in recession. The Fed seems to continue with 50 bps, while the probability of 75 bps is still low due to the uncertainty of the global recession threat.

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