This morning we received a slew of manufacturing purchasing managers’ indices (PMIs) for the month of May. Remember that a number above 50 signals growth.
The RBC Manufacturing index for Canada rose to 40.6 in May, from 33.0 during the month prior, suggesting that the manufacturing sector continued to contract last month, albeit at a slower rate than it did in April.
In the Eurozone, the manufacturing index rose six points to 39.4 last month, led by strong improvements in Italy (45.4) and France (40.6). The sector fared somewhat worse in Germany (36.6), typically considered the common currency area’s growth engine.
In the US, the Institute of Supply Management’s manufacturing index, considered amongst the best leading indicators of economy activity, rose 1.6 points to 43.1 in May. The reading came in largely in line with expectations (43.0), indicating that activity in the sector continued to decline last month, albeit at a diminished rate.
Most key sub-components of the ISM improved with New Orders, Production, Employment, and Export Orders all showing robust increases between 4 and 6 percentage points. Prices continued to fall, but the decline was less acute than in the month prior, providing some comfort for the Fed policymakers, many of whom are concerned with deflation. Only one subcomponent deteriorated, with Imports dropping 1.4 points to 41.3—indicative of continuing contraction in import volumes.
One third of US manufacturing industries experienced growth, bucking the trend in the broader sector and economy. The six manufacturing industries consist of:
- Non-metallic mineral products
- Furniture and related products
- Apparel, leather, and allied products
- Food, beverage, and tobacco products
- Paper products
- Wood products
Comments from business leaders suggest that the month of May might have been a turning point for the economy. However, the theme of uncertainty remains present and is unlikely to subside anytime soon.
The ISM’s nonmanufacturing survey results for May will be released on Wednesday, with economists expecting an improvement of about 2 points to 44–pointing to a slower contraction than before.
Then on Friday, the US Bureau of Labor Statistics will publish the May employment report. Consensus is for the loss of 8 million jobs and an increase in the unemployment rate to 19.6 percent. I think that job losses will be closer to 3 million, with the jobless rate rising to 17.5 percent.
Canadian employment numbers from the Labour Force Survey will also be released on Friday. Financial markets are looking for a 500k drop in employment, but I suspect the number will be closer to half that figure. In my opinion, the fiscal policy measures should temper the number of unemployed. Stats Can is doing an excellent job providing additional detail in their releases. To gauge the full extent of the labour market disruption, we will need to add to the headline unemployment estimate the number of workers employed at reduced hours and workers without a job who are not looking for a job (anticipating to return once lock-down is lifted). This aggregate figure is far more important that the traditional headline number.
There will also be a Bank of Canada rate announcement this Wednesday. No change in policy is expected, but the press conference will be closely watched since it will be Governor Tiff Macklem’s first decision at the helm (he was previously a Deputy Governor before leaving the Bank to join the private sector). When Governor Poloz started his tenure, he adopted a policy of writing the communique from scratch each time. This meant that markets could not simply focus on the slight changes in wording to glean insight. Whether or not the incoming Governor Macklem maintains the practice remains to be seen and will be closely watched. Moreover, the Wednesday press conference offers the first opportunity to assess how Governor Macklem views the current environment and his views on the appropriateness of the current stance of monetary policy. I am not expecting any fundamental shift.
