PMI Drops to Lowest since September 2009

May survey data signalled only a marginal improvement in the health of
the U.S. manufacturing sector. The headline PMI fell to its lowest level
since September 2009 as output growth eased and new orders fell for the
first time since August 2009. Weak demand conditions and ongoing trade
tensions led firms to express the joint-lowest degree of confidence
regarding future output growth since data on the outlook were first
collected in mid-2012. At the same time, employment rose at the slowest
rate since March 2017 and backlogs of work were unchanged. Meanwhile,
inflationary pressures eased further, with both input costs and output
prices increasing at softer rates.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing
Managers’ Index™ (PMI™) posted 50.5 in May, down from 52.6 in April. The
latest headline figure signalled only a slight improvement in operating
conditions, with the latest reading the lowest since September 2009. The
data for the second quarter so far have indicated a distinct slowdown in
the manufacturing sector compared to the first three months of 2019.

A key factor weighing on the headline reading was the softest expansion
of output since June 2016. May data signalled only a marginal rise in
production that was often linked to clearing backlogs of
previously-placed orders.

At the same time, manufacturers signalled the first decline in new
orders since August 2009. Though only fractional, survey respondents
stated that weak client demand drove the fall. Some firms also noted
that customers were postponing orders due to growing uncertainty about
the outlook. Similarly, new business from abroad contracted for the
first time since July 2018, albeit at a marginal rate.

Consequently, manufacturers exhibited a lower degree of confidence
towards output over the coming year. Expectations for growth dipped to
their joint-lowest since the series began in July 2012, as firms
highlighted concerns surrounding ongoing trade tensions and a growing
trend of customers postponing new orders, especially among large clients.

On the price front, cost burdens increased at only a modest rate in May.
The rise was the slowest since July 2017, with reports of tariffs
driving costs higher being countered by increased competition among
suppliers. Subsequently, firms increased their factory gate charges only
marginally amid efforts to remain competitive.

Meanwhile, firms signalled a further increase in employment in May. The
upturn was commonly linked to the replacement of voluntary leavers and
retirees. Nonetheless, the expansion was the slowest since March 2017
amid tight labour market conditions.

Finally, purchasing activity was broadly unchanged in May as firms
indicated greater efforts to use current inventories for production and
increased efforts to readjust stock levels in light of softer demand
conditions.

Commenting on the PMI data, Chris Williamson, Chief Business
Economist at IHS Markit said:

"May saw US manufacturers endure the toughest month in nearly ten
years, with the headline PMI down to its lowest since the height of the
global financial crisis. New orders are falling at a rate not seen since
2009, causing increasing numbers of firms to cut production and
employment. At current levels, the survey is consistent with the
official measure of manufacturing output falling at an increased rate in
the second quarter, meaning production is set to act as a further drag
on GDP, with factory payroll numbers likewise in decline.

“While tariffs were widely reported as having dampened demand and
pushed costs higher, both producers and their suppliers often reported
the need to hold selling prices lower amid lacklustre demand. While this
bodes well for inflation, profit margins are clearly being squeezed as a
result.

“With future optimism sliding sharply lower in May, risks to
near-term growth have shifted further to the downside.

“While companies of all sizes are struggling, the biggest change
since the strong growth seen late last year is a deteriorating
performance among larger companies, where surging order book growth just
a few months ago has now turned into contraction, the first such decline
seen in the series’ ten-year history.”

OUTPUT

U.S. manufacturers registered a notable slowdown in production growth in
May, with the pace of expansion easing to a marginal rate. The rise was
the smallest since June 2016, with firms often stating that demand
conditions had softened. Increased output was generally linked to
efforts to clear backlogs amid a lack of new work.

NEW ORDERS

The seasonally adjusted New Orders Index posted below the crucial 50.0
no change mark for the first time since August 2009 in May to signal a
decrease in new business received by manufacturers. Panellists commonly
attributed the decline to softer client demand, with some customers
postponing orders. Although the contraction was only fractional, it
indicated a notable turnaround from April's solid upturn.

NEW EXPORT ORDERS

New export orders received by goods producers fell in May. Though
marginal, the decrease in new business from abroad was the first since
July 2018. That said, the fall was the quickest since April 2016.
Anecdotal evidence indicated that weaker client demand drove the
contraction, with economic and political uncertainty dampening order
growth.

BACKLOGS OF WORK

Backlogs of work at manufacturers were unchanged in May, following a
solid expansion in April. Where a rise was reported, panellists linked
this to ongoing inflows of new work. Others, however, stated that a
slowdown in demand had allowed existing orders to be processed in a more
timely manner.

STOCKS OF FINISHED GOODS

Adjusted for seasonal factors, the Stocks of Finished Goods Index
signalled a marginal decline in post-production inventories in May.
Panellists suggested the fall was often due to deliberate efforts to
deplete stocks following a slowdown in client demand. Though only
slight, the renewed decrease in stock levels was the largest since last
December.

EMPLOYMENT

Employment across the manufacturing sector continued to increase in May,
despite softer output growth. Anecdotal evidence stated that larger
workforce numbers were linked to the replacement of voluntary leavers
and retirees. Nevertheless, the rise in staffing levels was the slowest
since March 2017.

OUTPUT PRICES

In line with the trend for input costs, average prices charged by
manufacturers increased at a softer pace in May. Notably, the rate of
inflation was the slowest since November 2016, with some firms
suggesting efforts to remain competitive had restricted their overall
pricing power.

INPUT PRICES

Input prices increased modestly in May, with the rate of inflation
easing for the seventh successive month. Where a rise was reported,
panellists linked this to the ongoing impact of tariffs and higher
supplier prices. The pace of inflation was however the slowest since
July 2017, with around 84% of survey respondents registering no change
in cost burdens. Some firms noted that a moderation in steel prices had
relieved pressure on cost burdens.

SUPPLIERS’ DELIVERY TIMES

Adjusted for seasonal factors, the Suppliers' Delivery Times Index
signalled a further deterioration in vendor performance across the
manufacturing sector in May. Delays were often linked by panellists to
shortages at suppliers. Nonetheless, lead times lengthened at a marginal
rate that was the least marked since the current sequence of
deterioration began in January 2017.

QUANTITY OF PURCHASES

Purchasing activity across the manufacturing sector continued to
increase in May, albeit merely fractionally. Although some firms stated
that the rise was due to greater production requirements, others had
reduced their input buying due to lower new order volumes and efforts to
clear inventories. Furthermore, the expansion was the slowest since the
current sequence of growth began in May 2016.

STOCKS OF PURCHASES

Pre-production inventories at goods producers declined for the first
time for two years in May. Although only slight, the contraction was
attributed to efforts to reduce stock levels due to softer demand
conditions.

FUTURE OUTPUT

Output expectations across the manufacturing sector remained
historically subdued in May. Moreover, the degree of confidence
regarding production over the coming year was the joint-lowest in the
series history (since July 2012), as firms highlighted concerns that
included the prospect of further tariffs, reduced new orders from large
customers and softer overall demand conditions.

NOTE

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contained herein, any errors, inaccuracies, omissions or delays in the
data, or for any actions taken in reliance thereon. In no event shall
IHS Markit be liable for any special, incidental, or consequential
damages, arising out of the use of the data. Purchasing Managers' Index™
and PMI™ are either registered trade marks of Markit Economics Limited
or licensed to Markit Economics Limited. IHS Markit is a registered
trademark of IHS Markit Ltd and/or its affiliates.

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