Data released today in the US, showed the ISM manufacturing index dropped to 52.1 in May, the lowest in two and a half years. Analysts at Wells Fargo point out employment held up, but production slowed and backlogs of orders declined. They also explained that tariffs were cited as a concern among respondents. Overall, they see the ISM signaling factory sector’s woes continued through May.
Key Quotes:
“Manufacturing activity continued to weaken in May, with the ISM index slipping to 52.1. That marked the slowest pace of growth for the factory sector since October 2016. There were a few signs of the escalation in trade tensions with China weighing on activity and sentiment, based on respondent comments. Further, with both the U.S. and China appearing to dig in during the survey period and the threats of broad tariffs on products from Mexico late last week, it is hard to see factory conditions improving in the near-term.”
“With trade tensions escalating over the month, further weakening in the ISM is a real possibility. It is worth remembering that the manufacturing sector accounts for only 11.4% of value add and 8.5% of employment. Even when the ISM dipped below 50 in late 2015-early 2016, the broader economy continued to expand, albeit at a slower rate.”
“We see greater risks today, however, that the slowdown in the manufacturing sector could spill over into the service sector. The 2015-16 drop was closely tied to the collapse in commodity prices and slowdown in China. Today, weakness is again tied to China’s deceleration, but more specifically to trade concerns. The risk that supply chains get gummed up, investment is put off and real consumer spending suffers amid the widening net of tariffs makes us more concerned that weakening in the manufacturing space may be a harbinger of weakening in the broader economy.”
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