Is the Manufacturing Growth Slowdown No Longer Welcome? Already?

On May 15, the Empire State manufacturing report kicked off the start of monthly regional Fed manufacturing reports with a composite reading of -1.0 vs an Econoday consensus expectation of 8.0.

by Mish

Econoday called the Empire State slowdown “welcome news”. It feared manufacturing was overheating.

Yesterday, the Richmond Fed manufacturing index plunged from 20 to 1. The Econoday consensus estimate was 15 in a range of 13 to 18.

Econoday had this to say regarding the Richmond Fed report:

Manufacturing activity in the Fifth district did expand for the seventh consecutive month in May, but just barely, with the index falling sharply by a surprisingly large 19 points to an almost flat reading of 1. The big decline from the lofty levels of the two previous months was a surprise to most analysts, who expected a more modest decline. Leading the steep fall were very big drops in some of the strongest components of the index previously — shipments, which dove 27 points to a minus 2, new orders, down 26 points to 0, and capacity utilization, down 31 points to minus 9. Also falling among the current conditions components of the survey was the backlog of orders, off 19 points from April to minus 15, and the average workweek, down 11 points to a minus 3. But employment remained solid otherwise, with wages rising 2 points to 23 and and the number of employees up 1 point to 6.
Looking ahead, manufacturing executives are still very optimistic, and while expectations measures did fall from the exuberant readings of the prior months, the declines are much less pronounced than in the current conditions part of the survey. Expectations for shipments fell 3 points to 39, the volume of new orders was down 11 points to 35, capacity utilization off 14 points to 29 and the number of employees as well as the average workweek down 5 points each at 20 and 8, respectively. Only capital expenditures are expected to increase, and were up 8 to 34.
Manufacturing executives reported that the prices they paid for goods, as well as the prices they received, rose at a more moderate rate than in the previous months.

Manufacturing PMI Grow Slows to 8-Month Low

Yesterday, the Markit Composite PMI report showed a pickup in the service sector but a slowdown in manufacturing.

Key Findings

  • Flash U.S. Composite Output Index at 53.9 (53.2 in April). 3-month high.
  • Flash U.S. Services Business Activity Index at 54.0 (53.1 in April). 4-month high.
  • Flash U.S. Manufacturing PMI at 52.5 (52.8 in April). 8-month low.
  • Flash U.S. Manufacturing Output Index at 53.3 (53.5 in April), 8-month low.

Markit Chief Business Economist Chris Williamson Comments

  • “Growth of US business activity gained a little momentum for a second successive month in May, but the upturn still looks somewhat underwhelming.”
  • “Historical comparisons of the PMI against GDP indicates that the PMI is running at a level broadly consistent with the economy growing at a 0.4% quarterly rate (1.5% annualized). Actual second quarter GDP numbers are likely to be considerably stronger, in part reflecting seasonality in the official data and the weak first quarter. “May saw an encouraging upturn in service sector growth to the fastest so far this year, buoyed by rising domestic demand. Manufacturers, on the other hand, reported the smallest rise in production since last September amid lackluster export sales.”
  • “There were mixed signals for the outlook. Optimism about the year ahead fell slightly, but hiring remained reassuringly solid, thanks to a step-up in service sector recruitment. The survey is indicative of non-farm payroll growth of approximately 160,000.”
  • “Average prices charged for goods and services meanwhile showed one of the largest rises in the past two years. The strengthening of business activity growth and rise in prices will add to expectations of the Fed hiking interest rates again in June.”

Markit Estimate for Second Quarter GDP

Williamson stated the PMI historically indicates 1.5% second quarter growth, but he expects it will be considerably stronger due to seasonality.

Why? The BEA revised its methodology already to reflect weak first and fourth quarter reporting.

More revisions are coming but in light of weak retail sales, weak auto sales, and weak housing, there is little reason to believe a huge surge in second quarter GDP is on the way.

No Longer Welcome?

Regarding the Markit composite PMI report Econoday commented, “This report is mixed with manufacturing continuing to run behind other advance reports though services are mostly positive.”

Econonday failed to note the “welcome” slowdown in manufacturing activity in the Richmond Fed survey and the Markit manufacturing survey.

Is the welcome manufacturing slowdown no longer welcome? Already? By the way, what other reports have been “mostly positive”?

Mike “Mish” Shedlock

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