The Institute for Supply Management’s PMI index reading for May 2011 of 53.5 surprised most analysts, even the pessimistic ones. The general consensus was for a slight downward move from April’s reading of 60.4 to 58. Even the worst of the pessimists only had it bottoming out around 55.
So using history, what does the 53.5 likely mean for June and beyond?
- The 53.5 reading in May 2011 is the lowest reading of PMI since September 2009
- The PMI dropped 12.9% from April (60.4) to May (53.5); the 12.9% drop is the biggest percentage drop in PMI in more than 7 years.
- The September-October drop in 2008 is the next highest in the past 7 years at 12.3%. I simply stopped looking after 7 years so it might be even farther back (PMI tables are easy to find online if you want to do the exercise yourself).
- The PMI has dropped 14.4% for the March to May 3-month timeframe. A drop in general is not unusual per se as in the past 6 years (excluding 2011) there has been a tendency of the PMI to decline from March to April in 4 of the past 6 years (a bit of pre-summer correcting perhaps?) but the average decline (excluding 2011) for those 4 years is an average of 3.5% in PMI vs. the 14.4% we’ve seen this year. Thus, 2011 is a 4x steeper decline than we’ve historically seen for this time period. This is a huge drop and beyond typical correction.
- In the years with declining March to May PMI (those 4 of last 6); 2 of the 4 shrunk again further thru June at an average further decline of 3%; whereas the other two increased only slightly vs. May @ 0.4% and 2.6%, but still stayed below March levels. In short, based on historical performance – it wouldn’t be unreasonable to expect June’s PMI (released July 1) to potentially drop again or only modestly tick up…this certainly explains manufacturing supplier hesitancy or uncertainty.
- If the index drops below 50; expect the dreaded R word to be in rampant use in media…50 or above means growth, below 50 means contraction.
The following article from Industrial Distribution is an interview with the Bradley Holcumb (I list him by his initials – BH) – he is the chair of the ISM (organization behind the PMI) and he speaks to the data in the May report and what it means to those in the manufacturing industry, and whether the decreasing growth should raise concern among manufacturers.
To me, his comments suggest that most of the market place for manufacturers are exercising a less than optimistic wait and see attitude.
ID: It looks like the growth was a little bit slower this month. Is this an indication of an overall lessening of the recovery, or should we be expecting a ‘peaks and valleys’ type situation?
BH: 53.5 as a PMI is clearly off 6.9 points, but it’s still in the growth category, it’s just growing slower. The things that are primarily impacting the PMI are the softening of growth in new orders and production, which are both off around 10 points. But we have to keep in mind that in January, Feb, March, April, all of these important primary metrics were in the 60s, which is really strong. Companies are taking their foot off the accelerator a bit for the month of May. There’s a little bit of a cautionary note, and a little bit of a wait and see.
ID: Are there any other major takeaways for manufacturers and distributors?
BH: I guess our overall sentiment here is continuing growth and cautious optimism, going forward over the next few months. We’re seeing some declines in these metrics for the first time this year, but it’s only one data point. Let’s not get ahead of ourselves; let’s wait until next month before we read too much into this.
Full Interview: http://www.inddist.com/Content.aspx?id=1499