While federal employment numbers released Friday show that U.S. manufacturing added jobs in May, the sector also continued a gradual softening, according to data released earlier this week by the Institute for Supply Management.
The ISM’s Purchasing Managers Index, which gauges U.S. factory activity, dropped by 0.5 points in May to 48.7, the second month in a row of contraction, following one month of positive reading in March. Any index reading below 50 signals contraction.
The primary driver of this decline was a contraction in new orders, which fell by 3.7 points from the previous month to 45.4. U.S. manufacturing activity remains subdued due to the high cost of capital, softening consumer spending and weakening pricing power in certain segments of the goods economy. However, there are indicators suggesting that the sector has plateaued, and we can expect a rebound with improving financing conditions, stabilizing inflation expectations and continued growth in business investments.
One area in the PMI that expanded was the manufacturing employment measure, which rose to 51.1, the highest level since August 2022. This indicates that labor conditions in the manufacturing sector are improving.
Payrolls tick up
The manufacturing sector added 8,000 jobs in May, following a downward-adjusted addition of 6,000 jobs in April, according to the Bureau of Labor Statistics. The manufacturing labor market has been softening since November 2022. However, based on a three-month moving average, job additions are ticking up following contractions in February and March.
Overall, the sector employed close to 13 million workers last month and the manufacturing job market remains robust, with a remarkably low unemployment rate of 2.7% compared to the broader economy’s rate of 4%. Additionally, the sector still has 516,000 open jobs, a significant decline from the nearly one million peak vacancies in the spring of 2022. Still, the figure remains above pre-pandemic levels.
Manufacturing hourly wages continue to grow at an average pace of 5% on a year-over-year basis, with average hourly earnings reaching $33.83 in May. The pace of the growth has stalled but continues to deliver positive real wages for the manufacturing workers with moderating inflation.
Read more RSM insights for the manufacturing sector.
The takeaway
Although labor conditions are improving, as evidenced by the decreasing number of open jobs and improving sentiment among manufacturers, finding tech-savvy talent capable of incorporating new tools at the operational level remains difficult. We expect healthy labor demand in the manufacturing sector to continue, particularly with the surge in new manufacturing construction and the build-out of domestic manufacturing capacity and supply chains.
