U.S. manufacturing in May hit four-year low, ISM says

U.S. manufacturing activity fell in May to its lowest level in four years, the Institute for Supply Management (ISM) said on Monday in its monthly survey of domestic manufacturing trends.

The ISM's "Purchasing Managers Index" (PMI), which gauges manufacturing strength among survey respondents, came in with a reading of 49 percent, down from 50.7 percent in April. A PMI reading above 42.2 percent over a period of time indicates economic expansion. By that measure, the overall economy grew for the 48th consecutive month, ISM said.

The May reading marks the first time since November 2012—a period when the nation was consumed by fears of an imminent "fiscal cliff" of budget cuts and tax increases--that the PMI has shown contraction. It is also the lowest reading since the recessionary period of June 2009, when the PMI came in at 45.8 percent.

Since the November 2012 low, the PMI rose to a short-term high of 54.2 percent in February. It then declined in March, and reported an even steeper fall in April.

In a statement accompanying the May report, Bradley J. Holcomb, chair of the committee that publishes the report, said that comments from various respondents indicate a "flattening or softening in demand" due to a sluggish U.S. and global economy.

The eight indexes that comprise the overall report didn't fare much better in May. For example, new orders contracted to 48.8 in May from a reading of 52.3 in April. Order backlogs dropped to 48 percent from 53 percent. New export orders fell 3 percentage points to 51 percent. Production declined nearly 5 percentage points to 48.6 percent.

Raw materials inventories at the supplier level continued to contract in May, though at a slower pace than in April. Customer inventories came in at 46 percent, a 1.5-percent increase over April data, but still at levels considered too low. End inventories have been at or below 50 percent from 50 straight months, an indication that stock levels remain very lean.

The one bright spot was in the "prices" index, which declined month-over-month for the first time since last July.

Various comments from supply executives included in the report underscore the impact the macroeconomic weakness had on their businesses last month. One executive blamed the reduction in government spending due to across-the-board budget cuts mandated under the "sequestration" that kicked in at the start of 2013. Another said that customers are holding back their orders in anticipation of further price declines for raw materials. Two respondents said their markets held up for part of May only to decline near the end of the month.

In a comment that seemed to capture the dour May sentiment, one executive remarked that the "general economy seems sluggish and pensive. Buyers are not buying much beyond lead times."

In a phone interview with DC Velocity, Holcomb said he was surprised by the weak data. However, he said that the May figures are one of many data points used to evaluate economic growth and that it doesn't square with the ISM's semiannual report on April 30 which forecast a 4.8-percent increase in manufacturing activity year-over-year.

Holcomb said manufacturers reacted quickly to the drop in new orders by quickly paring back their production. That would explain the decline in production and the drop in backlogs as more products were sold from existing inventory, he said.

Holcomb and other supply experts have said for years that sophisticated IT tools and best practices enable the supply chain to do a better job than ever in calibrating supply and demand.

PREVIEW TO STATE OF LOGISTICS?
The ISM survey comes slightly more than two weeks before the June 19 release of the annual Council of Supply Chain Management Professionals' "State of Logistics Report" in Washington, D.C. Rosalyn Wilson, the report's author, declined to comment on specific findings in her report. Nor would she make any forecasts ahead of the June 19 event, saying in an interview last week that she was still waiting for additional data—including today's ISM report—to finish her work.

However, Wilson said that, in terms of the overall condition of the U.S. logistics industry, 2012 turned out to be "pretty much a repeat of 2011" in that front-loaded strength was offset by back-loaded weakness. Wilson said the economy shows pockets of strength as well as weak points. She said that truck and rail intermodal rates have not been rising, despite a better profitability outlook from the truckers.

Ron Sucik, head of RSE Consulting, a transportation consulting firm, said sputtering economic growth, combined with surpluses in rail and equipment capacity, is keeping a lid on intermodal rate increases. The pricing weakness has come despite what is believed to be a bright outlook for intermodal growth as shippers seek alternatives to increasing capacity constraints on the highways.

Other than the booming market for shale oil and gas transportation, there's not much in the way of economic vitality for the railroads to hang their hats on at the moment, said Sucik. Sucik is a 40-year transportation veteran with stints at BNSF Railway and at TTX Co., the largest intermodal car provider in North America, where he retired from in 2006 as director of market development.

Still, railroads continue to expand their intermodal networks and add significant quantities of 53-foot domestic containers to compete with truckers on traffic lanes once controlled by motor carriers, Sucik said.