PMI, U.S. Manufacturing Indicator, Warns of Slow Growth Ahead

U.S. Manufacturing SectorOn Friday, May 1, 2015, the Institute for Supply Management (ISM) published its April report on the U.S. manufacturing sector. The key number to look at in this report is the Purchasing Managers’ Index (PMI), which is an indicator of the economic health of the manufacturing sector.

According to the institute, the U.S. national PMI is at 51.5%. This number is unchanged from March’s report. However, it is short of the expected 52%. (Source: Institute for Supply Management, May 1, 2015.)

U.S. PMI Above 50; Employment Still Troubling

PMI is based on five individual indicators: new orders, output, supplier delivery times, inventory, and employment. A PMI of above 50 indicates an expansion of the manufacturing sector, while being below 50 means a contraction.

Some analysts are taking the 51.5 PMI as a sign of growth. Indeed April 2015 is the 28th consecutive month in which PMI is above 50. However, looking at the components of the index, you will find that the performance is really lackluster.

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First, the bright side of things: new orders index improved to 53.5 from 51.8 in March. Production also increased; jumping from 53.8 in March to 56.0 in April.

The not-so-bright side shows the employment index is at 48.3, indicating that employment in the manufacturing sector is contracting. Moreover, the 48.3 reading in April is the lowest since September 2009. This is quite troubling: the March job report already showed a slowdown in growth in the U.S. labor market. This signals yet another continuation in the slowdown.

Note that the sectors with decreasing employment include computer and electronic products as well as chemical products. These sectors usually have more skilled labor than, say, restaurant services. The decline in employment in these sectors will likely contribute to stagnant wages, which will put constraints on workers’ disposable income.

Also making up the PMI is the institute’s price index. It is now at 40.5 in April, implying decreasing prices, or deflation, in the manufacturing sector.

World Economy: Similar Contracting Scenario

Three days later, on May 4, 2015, HSBC published the April PMI for China. The situation does not look good for the world’s second largest economy and the U.S.’s largest trading partner. The index is at 48.9, indicating a contracting manufacturing sector in China. Moreover, 48.9 is the lowest level the index has been in the previous 12 months. (Source: HSBC/Markit, May 4, 2015.)

The situation is similar in Europe. Using the U.K. as an example, its manufacturing PMI for April 2015 is 51.9, the lowest level in seven months. (Source: Markit, May 1, 2015.)

The world economy is not helping here. Keep in mind that many U.S. companies have businesses around the globe. When the world economy is not doing well, it is challenging for U.S. multinationals to grow their business.

The manufacturing industry is no longer a large part of the U.S. economy, but the Purchasing Managers’ Index is still a leading indicator for predicting economic expansions and recessions. While April’s PMI is negative, it won’t carry much weight in respect to the Fed’s decision in raising interest rates this September. The Fed will be more focused on the U.S. jobs number report to be released this Friday morning.