Pace of U.S. Manufacturing Slowing
By Ron DeLegge, Editor
June 1, 2011

SAN DIEGO (ETFguide.com) – Manufacturing has been one of the few bright spots in an otherwise tepid economic climate but the shine is unfortunately fading.

Consumer discretionary stocks (NYSEArca: XLY) and industrial stocks (NYSEArca: XLI) have been among the top performing industry sectors over the past year, but the PMI report could put that run in jeopardy. May’s PMI data was the first reading below 60 percent for 2011, as well as the lowest PMI reported for the past 12 months. What’s wrong?

Problem Areas
A look underneath the hood reveals some problem areas for the U.S. economy. 

The sub-indexes with the greatest declines were new orders (-10.7 percent) and backlog orders (-10.5 percent). In each case, Japan’s earthquake was a factor, particularly with a shortage of computer, electronic parts and electrical equipment, which contributed to losses in both sub-indexes. Are May’s numbers a short-term blip or a longer-term trend?

In other categories, swift declines within new orders were also experienced in furniture and related products, printing and related support activities and food, beverage and tobacco products. Put another way, consumers aren’t consuming as much as before.

Remember: New orders and backlog orders provide important clues of future economic activity and today’s readings could be a precursor of slower growth ahead.

Another big issue for the manufacturing sector is inflation.

“Manufacturers continue to experience significant cost pressures from commodities and other inputs," said the ISM report. This is especially bad news for consumers. Inevitably, the higher cost of raw goods makes its way through the economic chain and eventually hits consumers in the wallet via higher prices. Surging commodity prices (NYSEArca: GSG) amid tepid economic growth is not the recipe for a recovery.

Summary
The ISM Manufacturing survey is a barometer of manufacturing activity, particularly from the angle of purchasing managers employed by U.S. companies in the manufacturing sector. It surveys 400 companies in 20 sectors on new orders, inventories, employment and production. The PMI’s headline numbers are published based upon the survey’s results.

Unfortunately, May’s PMI report does not signal a U.S. economy in expansion mode. The expansion, it seems, is happening in emerging market countries (NYSEArca: EEM) but not here. Interestingly, multi-national companies like Caterpillar (NYSE: CAT) and Deere (NYSE: DE) have benefited from overseas activity, but will it be enough to keep the industrial sector afloat?

In conclusion, the full and active participation of U.S. consumers on a wide scale is required for the U.S. economy to mend itself back to full health. And only until then, a recovery is not a recovery unless it’s a recovery.