Manufacturing has been one of the few bright spots in an
otherwise tepid economic climate but the shine is unfortunately
The Institute for Supply Management (
) said in its Purchasing Managers Index (PMI) U.S. manufacturing
slowed during May by 6.9 percent from April. The PMI finished at
53.5 percent versus 60.4 percent for April. Steep declines were
seen in new orders, production and backlog orders.
Consumer discretionary stocks (NYSEArca: XLY) and
(NYSEArca: XLI) have been among the top performing industry sectors
over the past year, but the PMI report could put that run in
jeopardy. May's PMI data was the first reading below 60 percent for
2011, as well as the lowest PMI reported for the past 12 months.
A look underneath the hood reveals some problem areas for the U.S.
The sub-indexes with the greatest declines were new orders
(-10.7 percent) and backlog orders (-10.5 percent). In each case,
Japan's earthquake was a factor, particularly with a shortage of
computer, electronic parts and electrical equipment, which
contributed to losses in both sub-indexes. Are May's numbers a
short-term blip or a longer-term trend?
In other categories, swift declines within new orders were also
experienced in furniture and related products, printing and related
support activities and food, beverage and tobacco products. Put
another way, consumers aren't consuming as much as before.
Remember: New orders and backlog orders provide important clues
of future economic activity and today's readings could be a
precursor of slower growth ahead.
Another big issue for the manufacturing sector is inflation.
'Manufacturers continue to experience significant cost pressures
from commodities and other inputs,' said the
. This is especially bad news for consumers. Inevitably, the higher
cost of raw goods makes its way through the economic chain and
eventually hits consumers in the wallet via higher prices. Surging
commodity prices (NYSEArca: GSG) amid tepid economic growth is not
the recipe for a recovery.
The ISM Manufacturing survey is a barometer of manufacturing
activity, particularly from the angle of purchasing managers
employed by U.S. companies in the manufacturing sector. It surveys
400 companies in 20 sectors on new orders, inventories, employment
and production. The PMI's headline numbers are published based upon
the survey's results.
Unfortunately, May's PMI report does not signal a
in expansion mode. The expansion, itseems, is happening in emerging
market countries (NYSEArca: EEM) but not here. Interestingly,
multi-national companies like Caterpillar (
) and Deere (
) have benefited from overseas activity, but will it be enough to
keep the industrial sector afloat?
In conclusion, the full and active participation of U.S.
consumers on a wide scale is required for the U.S. economy to mend
itself back to full health. And only until then, a recovery is not
a recovery unless it's a recovery.