3 Numbers: UK manufacturing PMI to contract for a second month in May
- UK Manufacturing PMI is projected to remain below the neutral 50 mark in May
- A "yes" victory in this month's Brexit vote could even spark a recession
- US ISM Manufacturing Index should hold steady in positive territory—just barely
- No change is projected for US light vehicle sales in May compared to April
June kicks off with a busy schedule of economic updates, including the monthly update of the UK Manufacturing PMI report. Later, the US ISM Manufacturing Index for May arrives. We’ll also see fresh numbers on US light vehicle sales for May.
UK: Manufacturing PMI (0830 GMT) Britain’s manufacturing sector has been contracting lately, and the red ink is expected to spill once more in today’s update of survey data for May.
The Markit/CIPS Purchasing Managers’ Index for manufacturing slipped below the neutral 50 mark in April for the first time in three years. “Companies generally attributed the deterioration in operating conditions to a combination of softer growth of domestic demand and a reduction in new business from overseas,” Markit noted last month.
Econoday.com’s consensus forecast sees the contraction easing a bit for today's release. The headline PMI figure is projected to rise slightly to 49.6 for May, fractionally above April’s 49.2. But if the forecast holds, output will contract for a second straight month.
That’s hardly a surprise at this point. The hard data on industrial activity fell into the red in this year’s first quarter. But for the moment the outlook for UK growth overall is still positive, according to a recent forecast from the Confederation of British Industry (CBI). The trade group last month advised that UK GDP will expand by 2.0% in 2016 and next year. That’s moderately lower than the previous estimate, but it’s still comfortably in the positive column.
The elephant in the room, of course, is this month’s referendum on Britain’s membership in the European Union. A vote to quit the EU, many economists warn, could trigger a recession. That’s debatable, but until the outcome of the June 23 vote is known, macro analysis for the UK will suffer from an unusually large dose of uncertainty about what's waiting in the second half of 2016.
Keep in mind that the ISM reports of late have hinted at a mild recovery for manufacturing. After posting negative readings for five months through February, the ISM Manufacturing Index rebounded to slightly positive readings (above 50) in March and April.
In fact, the crowd’s looking for a third month of growth via today’s ISM report for May. Econoday.com’s consensus forecast calls for a fractional decline to 50.6, down from April’s 50.8. But if the estimate holds, this data will reflect three straight months of expansion, if only just barely.
For additional context, keep an eye on today’s revised PMI data for May, which is due out at 1345 GMT, or just ahead of the ISM report. Here too the headline index is on track to remain in the positive column, but by the thinnest of margins. Econoday.com’s outlook for the PMI in May: 50.5, down a touch from the flash estimate of 50.8.
Manufacturing, in other words, is expected to hold on to a growth bias... by a thread.
“There was a lot of presumably pent up spending given that the last few months were quite soft for consumption,” said the deputy head of US economics at Bank of America. “The consumer should be a fairly bright spot for the economy.”
Will the optimism on consumer spending extend to today’s monthly report on auto sales for May? Perhaps, although the crowd’s looking for no change in auto sales for May, according to Econoday.com’s consensus forecast. Spending on new light vehicles is expected to hold steady at 17.4 million units, unchanged from April. The estimate translates into a middling number relative to recent history.
The forecast, if it holds, will provide a degree of support for thinking that auto sales still have a decent chance for setting a record year as consumer spending expands at a healthy pace. But note that some analysts are adjusting expectations down, albeit modestly.
“Vehicle-sales growth appears to be flattening out,” said the senior vice president of forecasting at LMC Automotive, a consultancy. “While we do not anticipate a retraction in volume over the next 12-18 months, strong year-over-year growth will be difficult to come by.”
– Edited by Robert Ryan
James Picerno is a macro analyst/editor at CapitalSpectator.com. Follow James or post your comment below to engage with Saxo Bank's social trading platform.