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Supply Chain News: US PMI for May Shows Significant but Stable Manufacturing Contraction, while Atlanta Fed Predicts Massive Decline in Q2 GDP

Manufacturing Sector Continues to Contract but Up a Bit from April, while Fed Bank Sees Q2 GDP Fall of more than 50%

June 3, 2020
SCDigest Editorial Staff

The Institute for Supply Management was out Monday with its regular monthly Purchasing Managers Index for May, and to no one's surprise, it showed a significant reduction in US manufacturing activity.

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On Monday, the bank's GDPNow forecast that US economic activity would fall by more than half, with a decline of a staggering 52.7%.

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The modest good news - the Index stabilized and even rose a bit versus April, as many factories including those in the huge automotive sector began to re-open and start production back up.

For May, based on its survey of regular contributors to the database, the PMI came in at a level of 43.1, which is well below the 50 mark that separates US manufacturing expansion from contraction. But that score was up 1.6 percentage points from the April reading of 41.5, which was the lowest seen since the bottom of the Great Recession in 2009, when it dropped to just 39.9.

Some economists had predicted at the time that the April Index level would be as low as 35.

As can be seen from the chart below, after many years of consistent manufacturing expansion in the US, starting last August the PMI has been below 50 eight out of the last 10 months.

However, until April, those scores were generally just a little below the 50 mark, before the giant fall the last two months.

In a negative sign for future manufacturing growth, the ISM New Orders Index registered 31.8 in May. While that was an increase of 4.7 percentage points compared to the 27.1 reported in April, it also means new orders contracted for the fourth consecutive month. This is also the index's second-lowest reading since December 2008, when it registered 25.9.

 


Of the 18 manufacturing industries ISM tracks, four reported growth in new orders in May: textile mills; nonmetallic mineral products; food, beverage and tobacco products; and paper products.

The ISM report always includes some comments provided by survey takes. Here are a couple of highlights:

"Despite the COVID-19 issues, we are seeing an increase of quoting activity. This has not turned into orders yet, but it is a positive sign," said a respondent from the computer and electronics sector.


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"Business activity remains strong for consumable applications and very weak in durable segments," added a manager in the plastics and rubber products industry.

Finally, one respondent from the machinery sector said that "Getting out from under several suppliers being closed worldwide. Also, looking at what really needs to be in China."

Atlanta Fed Predicts Huge Drop in Q2 GDP

Everyone knows the decline in US GDP in Q2 is likely to be massive. While estimates from economists vary widely, typical is that recently offered by the Congressional Budget Office, which last week forecast a decline of 37% in the quarter.

That would be the steepest fall in quarterly GDP ever. But this week, the Federal Reserve Bank of Atlanta predicted it would be even worse.

On Monday, the bank's GDPNow forecast that US economic activity would fall by more than half in Q2, with a decline of a staggering 52.7%, falling from the previous week's forecast in part based on the ISM PMI results.

The Atlanta Fed anticipates personal consumption expenditures, which make up 68% of the nation's gross domestic product, to fall 58.1% in the April-to-June period. Gross private domestic investment, which accounts for 17% of GDP, is now projected to slide a huge 62.6%.

As somewhat of an offset to this dire forecast, the New York Fed expects US GDP to fall a "“mere" 35% in the current quarter.

Any reaction to this economic news? How bad is it going to get? Let us know your thoughts at the Feedback section below.

 

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