Manufacturing, Construction

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United States

The May ISM manufacturing index was essentially in line with expectations at 54.9 vs 54.8 in April (which was the lowest since December) and vs the estimate of 54.8. After falling by 7 pts in April, new orders rebounded by 2 pts to 59.5 which compares with its 6 month average of 61.2. Backlogs fell 2 pts to 55 but remain above its 6 month average of 54.2. Inventories were about flat m/o/m for both manufacturers and customers. Employment rose by 1.5 pts to 53.5 but after falling by 7 pts last month. The 6 month average is 54.6. Export orders were down by 2 pts at 57.5 but remains at a good level. With the drop in commodity prices, prices paid fell 8 pts to 60.5, the lowest since November.

While the headline number was a hair better, the number of industries seeing growth slowed to 15 from 16 in April. Two reported a contraction vs just one last month. The ISM summed up the report by saying “Comments from the panel generally reflect stable to growing business conditions, with new orders, employment and inventories of raw materials all growing in May compared to April. The slowing of pricing pressure, especially in basic commodities, should have a positive impact on margins and buying policies as this moderation moves up the value chain.”

Bottom line, after the initial post election spike in confidence that took this index to 57.7 in February, things have calmed down. I believe domestic demand is now a bit more uncertain, particularly in the auto sector, while export visibility has improved, particularly in Europe (but with China now more a wild card). On the policy front, who the heck knows what will happen at this point and that cloudiness in itself is enough to alter behavior. This all said, the numbers are good enough to see another rate hike in two weeks and I still believe one to be followed in September but the Fed has plenty of time after the June meeting to stew over that. While they desperately also want to start QT, the December meeting is a ways away. Either way, waiting as long as they have to hike rates leaves them with very little flexibility in either direction from here on out. With today’s timely data now out of the way, the 2s/10s spread is wider by one whole basis point but still narrower by more than 2 on the week.

Somewhat dated but relevant for Q2 GDP estimates was the construction spending figure for April. It missed badly with a 1.4% m/o/m drop vs the .5% expected increase but this was mostly offset by a 130 bps upward revision to March. Of particular note and getting to the worries over commercial real estate and the bank slowdown in lending (when a Fed President such as Rosengren continues to worry out loud about CRE, assume every bank is getting taps on the shoulder), private non residential real estate construction fell for the 3rd straight month. Residential construction fell .7% but after a nice string of gains. We might see a modest downtick in Q2 GDP estimates in response.