Examining the Recent Slump in ISM Manufacturing Index | Epsiode 140 | 06-04-24

We turn our analytical lens toward the ISM Manufacturing Index, which has displayed a concerning downturn. May's data reveals a sector in distress, contracting in 18 of the last 19 months. Such persistent weakness raises alarm bells about the possibility of an approaching recession. The new orders segment, a critical predictor of future manufacturing activity, suffered its sharpest decline since March 2022, indicating further headwinds for the industry.

Despite these gloomy indicators, there was an unexpected twist in the tale of manufacturing employment. After a seven-month slump, employment figures defied the downturn and expanded in May. This counterintuitive rise presents an enigma within the broader narrative of manufacturing malaise. However, it might not be sufficient to alter the Federal Reserve's cautious stance on interest rates, as inflation continues to assert its presence across the economy.

Inflation, in fact, remains a stubborn foe. While the prices paid component did exhibit a slight reprieve from nearly two-year highs, the relief was marginal. With inflation metrics still elevated, the anticipation of rate cuts seems premature. Analysts are speculating that the Fed may postpone such measures until at least the first quarter of 2025, seeking more consistent evidence of inflation receding into the background.

Well, the state of our manufacturing sector did not look too great in May. It is Tuesday, june 4th, and this is your regular segment of Markets with Megan. We're going to go over the economic data that we actually received yesterday, which is the gauge on the manufacturing sector. This is called the ISM Manufacturing Index. This is important because it typically comes out in the very beginning of each month and gives us an indication of the activity within the broad manufacturing sector. If this index comes in above 50, it means that the manufacturing sector is expanding. If it comes in below 50, it means that the manufacturing sector is contracting. Unfortunately, it turned back the other way by declining. It's now been in contraction territory for 18 out of the past 19 months.

Some people also like to look at this as a recession indicator. This being down 18 out of the past 19 months is typically what you see in a recession. Let's look at some of the details, though. When you look at new orders, they also are deeply in contraction territory. They saw the biggest monthly drop since March of 2022.

When you look at the prices paid component and this is important because the prices paid can be inflationary, so the markets tend to move on this instead of just the broad headline number. What we saw is that prices paid did drop in the month of May, but they were dropping from nearly a two-year high. What we saw in the month prior, and they still at 57, are in expansion territory, are still elevated, so inflation still is showing itself up here in the manufacturing side, employment. This was interesting because employment in manufacturing has been contracting for seven months now and it actually expanded for the first time in the month of May. So what does all this tell us? Basically, the economy is weakening.

We know that Inflation is still a problem. It is improving on a lot of different metrics, but it's not improving enough, in our opinion, to be thinking that the Fed can cut rates in July, September. We even still think it might be more of a first quarter of 2025 story, and that's because the Fed's just not getting enough information on a consistent basis to say that inflation is completely behind us. That's all we have today. We'll have a bunch more this week. We'll get the ISM Services Index. That's important because that's where we spend the majority of our money on the service sector, and that inflation side is something we'll pay close attention to, because the Fed has made comments on how service inflation is sticky, and then we'll round out the week with the unemployment report. That's all we have. If you have any questions or comments, please feel free to reach out to podcasts at Verdence. com. Thank you.