The ISM manufacturing index registered a larger-than-expected contraction in May, with a drop in orders and a slowdown in production. Construction also came in weaker than expected, indicating that monetary policy is tightening and acting as a drag on economic activity, according to an ING report released Monday.
The ISM fell from 49.2 in April to 48.7 in May, indicating a contraction in the manufacturing sector. Regional surveys and the Chinese PMI had suggested a slightly different result, but the drop in orders and the slowdown in production were more pronounced than expected, ING adds.
The price component dipped slightly, but remains above the average of 54.1, indicating that inflationary pressures persist in the sector.
“The only good news was the employment component, which rose above the 50 level, the highest level since March 2022, but with production slowing and orders looking weak, there are doubts about its sustainability,” the bank’s experts add.
Construction hit by high borrowing costs and lack of affordability
On the other hand, construction spending fell for the second consecutive month and is expected to see a gradual moderation in the sector. High borrowing costs and tight lending conditions remain a constraint, and in the particular case of the residential sector, where affordability is so limited, this is leading to weaker housing starts and building permits, which should translate into further weakness in construction spending.
The non-residential sector (outside of office construction) is also expected to slow, albeit from solid rates, as the initial surge of support from the Inflation Reduction and CHIPS production acts increasingly fades.
Overall, the data are consistent with the view that the manufacturing sector is not going to contribute significantly to economic activity this year. Construction is also affected by high borrowing costs and lack of affordability, which may lead to a gradual moderation in the sector, experts add.
To read the full report you can access the following link.
