In May, US factory activity contracted at a faster rate, with output nearing stagnation and new orders experiencing their steepest decline in nearly two years. According to data released on Monday by the Institute for Supply Management (ISM), the manufacturing gauge fell by 0.5 points to 48.7, marking its weakest level in three months. A reading below 50 indicates contraction, and this figure was softer than the 49.5 median estimate from a Bloomberg survey of economists.
The ISM’s measure of new orders dropped by 3.7 points to 45.4 in May, the largest decline since June 2022. This decrease pushed the bookings index to its lowest level in a year, suggesting a significant weakening in demand across the economy. Consequently, the ISM’s production index slipped to 50.2. Seven industries, including wood products, plastics and rubber, and machinery, reported contracting activity in May, while seven sectors reported growth.
“Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions,” stated Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee. “These investments include supplier order commitments, inventory building, and capital expenditures.”
The data indicate that US manufacturing is struggling to gain momentum due to high borrowing costs, restrained business investment in equipment, and softer consumer spending. At the same time, producers are contending with elevated input costs. “I think we plateaued,” Fiore mentioned in a call with reporters. “Without some kind of movement on the monetary side here, we’re probably sitting where we’re going to sit for quite some time.”
While the ISM’s index of prices paid for materials and other inputs eased to 57 last month, it remains the second-highest in about two years. Twenty-six percent of companies reported higher prices in May, down from 31% in April.
On a positive note, there were signs of increased export demand, as a gauge of export orders grew for the third time in the last four months. Additionally, factory employment saw an uptick, with the group’s measure rising to 51.1 in May, the highest since August 2022, indicating that producers are having more success in securing labor.
Market Implications and Investment Opportunities
Short-Term Market Reactions: The decline in US factory activity may initially lead to negative sentiment in the stock market, particularly affecting industrial and manufacturing stocks. Investors might consider short-term trading opportunities by focusing on sectors less impacted by these trends or by taking advantage of potential dips in manufacturing stocks for future gains.
Long-Term Market Impact: Sustained weakness in manufacturing could signal broader economic challenges, potentially leading to changes in monetary policy. Investors should monitor central bank actions and fiscal policies that may aim to stimulate growth. Long-term investment opportunities could arise in sectors poised for recovery once economic conditions stabilize.
Strategic Diversification: Given the current manufacturing challenges, investors should consider diversifying their portfolios to include a mix of defensive stocks, such as those in the healthcare and consumer staples sectors, along with growth stocks in technology and renewable energy. This approach can help mitigate risks and capitalize on emerging opportunities.
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