New Manufacturing PMI Data Could Enforce Fed Inflation Path
The market is reacting to ISM’s headline findings, but S&P offered a more favorable picture of the manufacturing economy.
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* The market is reacting to ISM’s May manufacturing PMI contracting, but S&P’s findings show a more vibrant manufacturing economy.
* Both ISM and S&P Global May manufacturing PMIs show job creation up and inflation not backing down in a meaningful way.
* The net view is the manufacturing economy is growing and the Fed is remaining on its current “need to see more good data" path.
In addition to the April construction spending report, this morning also brought back-to-back views on the manufacturing economy in May via the ISM and S&P Global Manufacturing PMI reports.
Typically, these two reports show similar findings, but from time to time they differ considerably. The May data show one of those “differ considerably” months with the ISM manufacturing PMI showing that activity contracted again in May, which marks the second consecutive month of that trend. However, both reports pointed to a pick-up in job creation and inflation pressures not backing down in the manufacturing sector. Our take is that the combined data point to an economy still growing above trend, but that inflation pressures will keep the Fed on its current path.
Unlike ISM’s May data, findings from S&P Global show the domestic manufacturing economy accelerated in May with new orders expanding and hiring increasing for the fifth consecutive month. ISM’s employment sub-index also rose to 51.1, the first print in expansion territory in the last four months. Paired with S&P’s employment findings for the manufacturing sector, this suggests we could see some upside in Friday’s employment report for May. We’ll have a better sense following ADP’s May employment change report on Wednesday and the May Service PMI reports on Thursday.
When we look at the dip in 10-year Treasury yields, we can surmise the market is reacting to ISM’s headline findings. Those findings will be an input into GDP calculations for the current quarter, which means this morning’s data will contribute to another downward revision for the likes of the Atlanta Fed GDPNow model. The quick thinking is that this could help argue for rate cuts sooner than later, but when we look at the inflation comments in both May manufacturing PMI reports, we continue to see one rate cut late this year.
S&P found that manufacturing input prices increased sharply and selling prices were up as well. ISM’s prices paid component came in at 57, down from 60.9 in April and below the forecasted figure of 60. While the sequential fall is positive, the May figure of 57 was still above those for the figures of 52.5 for February and 55.8 for March. These tell us that inflation did not subside in a meaningful way in the manufacturing economy during May. Similar to our job creation comments above, Thursday’s service PMI reports will add another dimension for May inflation as will the wage data from ADP and the May employment report.
