Manufacturing activity sees third straight month of declines in May, reports ISM

Manufacturing activity fell for the third consecutive month in May, according to the new edition of the Manufacturing Report on Business, which was issued today by the Institute for Supply Management (ISM).

The report’s benchmark reading, the PMI, came in at 48.5 (a reading of 50 or higher indicates growth), down 0.2% from April’s 48.7 reading. The last three months of declines were preceded by gains, with January and February readings at 50.9 and 50.3, respectively, and were preceded by 26 months of declines.

The May PMI matched the 12-month average of 48.5. January’s 50.9 and October’s 46.9 mark the respective high and low readings for that period.

ISM reported that seven manufacturing sectors saw growth in May, including: Plastics & Rubber Products; Nonmetallic Mineral Products; Petroleum & Coal Products; Furniture & Related Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; and Machinery. Sectors seeing contraction included: Paper Products; Wood Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Transportation Equipment; Chemical Products; and Primary Metals.

The report’s key metrics were mixed in May:

• New Orders, considered the engine driving manufacturing, rose 0.4%, to 47.6, contracting, at a slower rate, for the fourth consecutive month. The category has not seen consistent growth since a 24-month stretch of expansion ended in May 2022 (ISM reported that eight sectors saw growth in New Orders in May);
• Production, at 45.3, increased 1.4%, contracting, at a slower rate, for the fourth consecutive month, following two months of growth, which was preceded by eight consecutive months of contraction to end 2024, with seven sectors reporting growth;
• Employment, at 46.8, increased 0.3%, contracting, at a slower rate, for the fourth consecutive month (and 30th time in the last 37 months), with four sectors reporting growth;
• Supplier Deliveries, at 56.1 (a reading above 50 indicates slower deliveries), were off 0.9% from April, slowing, at a faster rate, for the sixth consecutive month, with 10 sectors reporting slower supplier deliveries;
• Backlog of Orders, at 47.1, increased 3.4%, contracting, at a slower rate, for the 32nd consecutive month, following 27 months of growth, with four sectors reporting growth;
• Prices, at 69.4, fell 0.4%, increasing, at a slower rate, for the eighth consecutive month, rising 19.1 percentage points over the last six months, with the last three months seeing the highest readings since June 2022 (78.5 percent): 69.8 percent in April and 69.4 percent in March and May, with 16 sectors reporting higher prices;
• Inventories, at 46.7, fell 4.1%, contracting after two months of growth, with six sectors reporting higher inventories;
• Customer Inventories, at 44.5, fell 1.7%, coming in “too low,” at a faster rate, for the eighth consecutive month, with three sectors reporting customers’ inventories as too high; and
• Imports, at 39.9, down 7.2%, contracting, at a faster rate, for the second consecutive month, after three months of growth, for a cumulative 12.7% decline, over that period, with ISM observing that imports continue to contract as demand has reduced the need to maintain import levels from previous months, as well as due to the impact of tariff pricing

Tariffs and the economy were again the main themes cited in ISM panelist comments.

“There is continued softening of demand in the commercial vehicle market, primarily related to higher prices and economic uncertainty,” said a Transportation Equipment respondent. “The impact of ever-changing trade policies of the current administration has wreaked havoc on suppliers’ ability to react and remain profitable. Vehicle manufacturers have already rolled price increases into their products to protect their bottom lines but have not been as cooperative with their supply bases. This has resulted in a high occurrence of suppliers falling into financial distress.”

And a Food, Beverage & Tobacco Products panelist explained that tariffs, avian influenza and broader commodity markets continue to impact business conditions, adding that the volatility of all three makes business planning and overall conditions challenging.

In an interview with LM, Susan Spence, Chair of the ISM’s Manufacturing Business Survey Committee, likened the findings of the report to manufacturing being in what she called a holding pattern on various fronts, due to various economic factors.

“The economy, one would argue, was not in bad shape a few months ago,” she said. “Unemployment was low, and there was this underlying strength, but now, there is this uncertainty of not only not knowing what next month will bring but really also what the next few hours may bring, and ‘what am I going to be shocked by today?’ It really is whiplash.”

Addressing the 7.2% decline in imports, which marked the lowest monthly tally in 16 years, Spence said that the reading made sense, with things remaining paused, or in a holding pattern.

What’s more, she said that were market conditions to quickly improve, the pace at which they turned around remains unclear.

“You can have a positive development, like trade deals, but then in this environment, especially since February, it's like, ‘that's going to get undone, because that's the pattern,’ and there is absolutely a pattern,” said Spence. “The question is, do the businesses trust that if they make a move, whether it's hiring people, buying inventory, or making some capital expenditures, are they going to regret it 48 hours from now? What do you do when there's uncertainty, and no sudden movements?”

With another month of declining customers’ inventories and increasing backlog of orders, Spence noted that as customers’ inventories see declines, at some point, and depending on the industry they are in, they need to reorder. If that figure remains too low, she said it is logical to think backlogs should start picking up unless customers just are not going to order, because they have an uncertain outlook.

“I'd like to be optimistic and say there's time to recover, but if this continues to go on for months and months and months, who knows?” she said. “The sentiment that tariffs will lead to increased manufacturing in the U.S. and companies build factories needs to remember that it takes years to build a factory. And so just when you're ready to cut the ribbon and then open the door, now the world has changed. We have a big discussion in supply management advisory boards that I had been on when this whole, this whole offshore thing was a big deal and labor arbitrage was hard to pass up. But did people really look at the cost of shipping all that stuff across the ocean, especially the delays—this was at the beginning of the pandemic— people said that you need to look at the total cost of moving that product. Likewise, if you're going to build a factory in the U.S., are the economic conditions that make that good decision today going to hold?”