Implications:  Activity in the manufacturing sector continued contracting in May, as the ISM Manufacturing index lagged expectations and fell to a six-month low. However, the details of the report make it surprising that the headline number declined to 48.5 from 48.7, as the major measures of activity moved higher in May.  The overall decline was entirely due to a fall in the inventories index, which dropped to 46.7 after two months of sitting in expansion territory, likely a reversal of the unprecedented surge in imports as companies stockpiled materials before tariffs were enacted (for more info on how that has distorted economic data, see today’s Monday Morning Outlook). Looking at the other details, the production index increased to 45.4 from 44.0, but besides last month, that is the lowest level since the height of the pandemic.  Order books were already weak before this year and the added business uncertainty from tariffs along with government spending cuts are forcing companies to continue revising their production plans downward. In turn this has impacted their hiring efforts, as the employment index remains firmly in contraction, with more than double the industries (nine) reporting lower employment in May versus higher (four).  On the supply chain front, one comment from the Electrical Equipment, Appliances, & Components industry wrote that tariffs alone have created supply chains disruptions rivaling that of COVID. The supplier deliveries index increased to 56.1 in May – a 35-month high – but that is far from the worst we saw during the COVID supply chain disruptions, where the index reached the high 70s.  In other words, supplier bottlenecks are significant, but not nearly as bad as COVID levels.  Finally, the worst part of the report is that inflation remains a problem, even while manufacturing stagnates.  The prices index declined to 69.4, but besides last month that is the highest level since 2022. Not a good sign for the economy.  In other new this morning, construction spending fell 0.5% in April, led by drops in homebuilding, manufacturing, and power projects.

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