Softer manufacturing sentiment in May is within our expectations as elevated interest rates continue to weigh on overall goods demand. The Institute of Supply Management’s manufacturing index fell to 48.7 from 49.2, the lowest level in three months. Over a period of time, a reading above 48.7 indicates expansion.
The recent pullback in spending on durable goods, signaled by the most recent personal spending data, suggests that most of the pandemic pent-up demand has been exhausted. Consumers who are in the market for a new car or washing machine are likely discouraged by high borrowing costs, pushing sales down even more. The subindexes for new orders and production both fell on the month.
That is good news when it comes to inflation as businesses will continue to lower their prices to keep sales intact. The prices paid subindex dropped to 57 from 60.9, remaining within a healthy non-inflationary range when compared to the pre-pandemic period.
Goods inflation has been in negative territory for quite some time now. With services inflation expected to come down via the housing channel, we should be able to reach 2.3% inflation by the end of the year, per our forecast.
Despite all of that, hiring sentiment is positive for the first time since September last year, rising to 51.1 from 48.6, in line with our forecasts for a slight rebound in manufacturing job gains of around 1,000 in May. Total payroll change should be around 200,000 with upside risks as seasonal factors might swing short-term employment categories like leisure and hospitality, while government hiring remains a wildcard.
Inventories remained somewhat tight, but definitely improved compared to the last two quarters. We should expect inventories to rebound even slightly in the second quarter, a likely important factor keeping total gross domestic product growth strong.
Read more of RSM’s insights on manufacturing, the economy and the middle market.
