The manufacturing sector continued its recent run in May, growing significantly for the fifth consecutive month on the back of tariffs and the AI buildout, according data from the Institute for Supply Management.
Demand was particularly strong in May, buoyed in part by the prospect of a resolution of the Iran war.
But more consequential were signs that the sector may be overheating. Demand and supply are moving in opposite directions. New orders have outpaced inventories for months. Survey respondents suggested the current pace of expansion may not be sustainable.
There is little doubt that the business sector—especially manufacturing—has been on a substantial rally in recent months, lifting overall economic activity.
But rapidly rising inflation may prove too much for the rally to continue.
Energy prices are unlikely to ease materially so long as the Strait of Hormuz remains effectively closed.
The only development that could push energy prices lower—and by extension overall inflation—is demand destruction. Should that materialize, it would spell deeper trouble for the manufacturing sector.
RSM is not alone in this view. Even as the headline number pointed to a broad acceleration in manufacturing activity, the granular survey responses conveyed far less optimism. Executives who participated expressed more doubt than relief.
Investors and analysts alike should resist equating stock market euphoria around artificial intelligence with durable, ground-level growth.
Inside the data
The ISM manufacturing purchasing managers index registered 54.0% in May, up by 1.3 percentage points from April and its highest reading since May 2022, with the overall economy expanding for the 19th consecutive month.
New orders led the way at 56.8%, with a 1.6-to-1 ratio of positive-to-negative respondent comments. Customer inventories fell to only 42.7%—underscoring the demand-supply imbalance at the heart of our cautious outlook.
On employment, the picture was telling: The employment index registered 48.6% in May, 2.2 percentage points above April’s reading of 46.4%, but still in contraction for the 32nd consecutive month.
A sector expanding at its fastest pace in four years is not translating into hiring—a disconnect that warrants attention.
The prices paid index hit 84.6% in April, its highest reading since April 2022, rising for 19 consecutive months. Supplier delivery times deteriorated at their fastest pace since August 2022.
