The Institute for Supply Management (ISM) manufacturing purchasing managers index (PMI) came in at 48.5 in May, indicating contraction in U.S. manufacturing for a third straight month. The latest reading was below the forecast of 49.3.
Here is an excerpt from the latest report:
Spence continues, “In May, U.S. manufacturing activity slipped further into contraction after expanding only marginally in February. Contraction in most of the indexes that measure demand and output have slowed, while inputs have started to weaken.
“Looking at the manufacturing economy, 57 percent of the sector’s gross domestic product (GDP) contracted in May, up from 41 percent in April. The share of manufacturing GDP registering a composite PMI® calculation at or below 45 percent is a good metric to gauge overall manufacturing weakness; in May, this figure was 5 percent, a 13-percentage point decrease compared to the 18 percent in April. Of the six largest manufacturing industries, two (Petroleum & Coal Products and Machinery) expanded in May, compared to four in April,” says Spence.
Here is the table of PMI components.
Background on ISM Manufacturing PMI
The ISM Manufacturing Index aims to measure the health of the manufacturing sector through a survey. The ISM Manufacturing Index is a diffusion index, meaning that a reading above 50 indicates expansion in the sector compared to the previous month and a reading below 50 indicates contraction. Additionally, the distance from 50 indicates the extent of expansion or decline.
ISM Manufacturing PMI and Recessions
What sort of correlation does the ISM Manufacturing PMI have with recessions? The month before a recession, the index has ranged between 42.1 and 66.2 with an average of 49.7, a level we currently sit below. As you can see, the index's value at the start of recessions has had quite a range, some in expansion territory and some in contraction territory. Therefore, it is more useful to look at the behavior of the PMI during those recessions (always contracting) and the behavior of the PMI outside of recessions (mostly expanding).
Here is a closer look at the series beginning at the turn of the century. The latest reading of 48.5 keeps the index in contraction territory for a third straight month after two months in expansion. Prior to that, the index contracted for 26 consecutive months from November 2022 to December 2024, the longest streak on record.
ISM PMI Comparison: Manufacturing vs. Services
The next chart offers a comparison between the two Purchasing Managers' Indexes provided by the Institute for Supply Management. See the latest update on the Services PMI here.
ETFs associated with industrials and manufacturing include: First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF (VIS), and iShares U.S. Industrials ETF (IYJ).
