May’s ISM reading of 54.9% was essentially unchanged from April’s 54.8% and roughly matches the anticipated 54.8%. The important production index fell to 57.1%, and the new orders index was also higher at 59.5% from 57.4% in April, though still below the exceptionally high 64.5% reached in March. The employment index increased to 53.5%, and the prices paid index slipped to 60.5%. Meanwhile, comments from the respondents were very optimistic, seemingly more so than previous reports, with a number complaining about skilled labour shortages.
Bottom line: May’s ISM at 54.9% was largely unchanged from April’s report and shows that manufacturing is expanding at a decent pace. According to the ISM: “The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (56.1 percent) corresponds to a 4.0 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for May (54.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually.” That 3.7% seems awfully high. We think the difficulty here is that the ISM is looking at the index from its starting point in 1948. However, looking at shorter time periods shows that the ISM regressed against GDP from 2000 onward, suggesting that the current reading is more consistent with a rate of 2.5% GDP growth. This is still very solid and should be enough to keep the Fed on course for a rate increase in two weeks’ time.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.