Against consensus economist calls for a modest increase to 53.0%, the Institute for Supply Management showed Monday morning that its Manufacturing Index fell 0.7 percentage point from April’s 52.8% to 52.1% in May. The monthly report on economic activity in the manufacturing sector is interpreted by readings over 50% signaling that more businesses are expanding than contracting and vice-versa for under 50%.
May’s figure represented the lowest level for the index since October 2016.
Despite the deceleration in activity, the ISM index has been over 50 for 121 straight months demonstrating the resiliency of the factory sector.
The headline figure is calculated from 10 sub-indexes. The closely watched new orders index improved 1 percentage point in May from April to 52.7%. Also notching gains for the month was the employment index (to 53.7% from 52.4%) and the prices index (to 53.2% from 50.0%).
Pressure came from decreases in the production index (to 51.3% from 52.3%), the supplier delivers index (to 52.0% from 54.6%) and the inventories index (to 50.9% from 52.9%).
The index for backlog of orders was the only one to flip from expansion into contraction territory, slipping to 47.2 from 53.9.
The customer’s inventories index gained 1.1 percentage point, but held in contraction territory at 43.7%, while the imports index fell deeper under 50%, losing 0.4 percentage point to 49.4%.
Respondents to the ISM survey frequently mentioned tariffs implemented on goods coming from China as factors in activity. One respondent from the chemical products industry noted, “The threat of additional tariffs has forced a change in our supply chain strategy; we are shifting business from China to Mexico, which will not increase the number of U.S. jobs.”
Of course, the survey was conducted before U.S. President Donald Trump late last week unveiled his intentions to hit Mexico the tariffs if the country doesn’t make concerted efforts to stem the inflow of illegal immigrants into America. Trump’s aggressive plan involves starting tariffs on all Mexican goods at 5% with 5% monthly increases until a 25% level is reached.
China has its feet planted in the sand, with Beijing calling the U.S. tariffs on Chinese goods economic terrorism, while saying it will not kowtow to Trump’s demands. China is reportedly preparing to launch a new counterattack to the tariffs, including hoarding rare earth metals the U.S. needs to things like autos and technology products.
The U.S. produces negligible amounts of rare earth metals, importing the vast majority of its requirements from China. Worse yet, the U.S. is still in the early stages of building the infrastructure to produce REEs.
Things could be starting to get ugly.
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