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US Manufacturing Contraction Slowed in May

The May ISM index Monday showed US manufacturing sector activity contracted further, but at a slower pace, in line with the regional and Markit data.

Survey respondents in the ISM report noted while COVID-19 continues to weigh heavily on business activity, there were improvements seen in May due to some states reopening.

As more states move in that direction in June, the manufacturing measures should advance further, but it may take a few months for the sector to actually expand again and even longer to recover the lost productivity over the spring.

The headline PMI index rose to 43.1 from 41.5 in April, above expectations for an increase to 42.7. There were improvements in most of the key components, though the data still point to continued contraction.

The new orders index rose to 31.8 from 27.1 in April, while the production reading improved to 33.2 from 27.5, but both are still significantly below their break-even points.

The employment index rose to 32.1 from 27.5 in April, suggesting that manufacturing employment could post a smaller decline in Friday’s May employment report than the 1.33 million decline last month.

The Markit manufacturing index released earlier Monday was unrevised at 39.8, as expected, above the record low 36.1 reading in April.

Construction spending for April, released at the same time as the ISM report, fell by 2.9%, well ahead of the 5.5% decline expected, after a virtually flat reading in March. Even so, year-to-date construction spending was up 7.1% from the same period a year earlier.

Private residential construction fell by 4.5%. Calculations using the published data show that private new home construction fell by 7.0%. The housing starts and permits data for April already pointed to a significant slowdown that is likely to depress new home construction for several months.

In contrast, home remodeling was roughly flat as homeowners continued their projects under lockdown. When private home remodeling is excluded from total construction, overall construction would have been down 3.4%.

Private nonresidential construction spending fell by 1.3%, with declines in every category except for manufacturing. As a result of the pandemic, there may be a shift in sentiment toward home offices and away from office buildings for the foreseeable future. Public construction spending fell by 2.5%.

Kevin Kastner

Julie Ros

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