US ISM Manufacturing PMI May Preview: Gloom persists despite an US expanding economy
- PMI forecast to slip to 54.5 from 55.4, orders should rise to 53.6.
- Markets monitoring US economy for signs of inflation’s impact on consumers..
- S&P Global May manufacturing PMI was as forecast, services weaker..
All eyes are on the US economy, alert for signs that businesses are beginning to feel the impact of an inflation-weakened US consumer on their bottom line.
The Purchasing Managers’ Index (PMI) for manufacturing from the Institute for Supply Management is expected to slip to 54.5 in May from 55.4. The New Orders Index is forecast to rise to 53.6 from 53.5 and the Employment Index should edge to 53.6 from 50.9. Prices are predicted to climb to 86.2 from 84.6 in April.
In April, overall PMI was down from its recent high in February of 58.6. New Orders had faded from 61.7 in the same month and employment was down from 56.3 in March, its best level since 57.7 a year earlier.
Inflation, consumer spending and the saving rate
Inflation has been taking an ever increasing bite of US wages for more than a year. With the Consumer Price Index at 8.3% annually in April and the headline Personal Consumption Expenditure Price Index at 6.3% and the core rate at 4.9%, the purchasing power of workers wages declined 2.6% in April and 2.7% in March.Salaries have been losing ground to inflation for 14 months.
CPI
While Retail Sales and Personal Spending, the two main gauges of consumption, have been relatively stable, consumers have been forced to dig deep into savings in order to maintain their purchasing habits. The US saving rate fell to 4.4% in April, the lowest since 2008, according to a Commerce Department report.
Almost two-thirds of US economic activity is tied to the consumer. It is an open question how long families and households can continue to deplete their savings. To put it another way, unless either wages rise or inflation falls, people will soon be forced to reduce discretionary spending in order to maintain the necessities, food, shelter and transportation, all of which have increased in price more than the general inflation rates.
Federal Reserve
The Federal Reserve’s newly minted inflation policy is expected to hike the fed funds rate by an additional 200 basis points to 3.0% by the end of the year, now just seven months distant.
The US economy contracted 1.5% in the first three months. Second quarter growth is running at 1.9% in the Atlanta Fed GDPNow estimate with one month to go.
Rate increases are designed to curb inflation by reducing economic growth. Can the Fed maintain its hard line against inflation if the US economy slips into a traditional recession in the second quarter?
The answer to that question will not be known until GDP is reported in late July, after the next two Fed meetings. A 50 basis point increase is expected on June 15 and again on July 27.
It will be the US consumer who determines second quarter growth. At the moment it appears Americans have decided on the optimistic course, hoping for economic improvement.
S&P Global PMI
Indexes for May from S&P Global came in as expected for the service sector at 57.5, though down from 59.2 in April. Manufacturing PMI was lower at 53.5 than the 55.2 forecast and April’s 55.6 reading. The Composite Index dropped to 53.8 from 56.0.
The services index has been lower than manufacturing over the past six months, and both have bounced around but neither have exhibited a negative trend.
S&P Global Manufactruing PMI
Market Conclusion
Markets are primed for negative economic US news that has not yet arrived.
Equities are flirting with bear market averages concerned that inflation will force the US consumer to curtail spending precipitating a recession. Or, possibly, that Fed rate increases will slow an already feeble economy into a decline.
Treasury yields have fallen from their early May highs as credit markets have factored in the impending inflationary drag on consumption. The dollar has been sold as Treasury yields peaked and then reversed. Earlier safety trade flows have been withdrawn as the Ukraine war has subsided into stalemate and its immediate threat to the global economy has waned.
Market risk is heavily on the downside as a poor result will tend to confirm existing fears, with equities, the dollar and Treasury yields all likely falling in response.
Readings at or better than forecast will mitigate immediate fears but not provide confidence in the future, pausing current market trends rather than promoting higher levels in stocks, Treasury returns or the dollar.