The manufacturing sector expanded at the slightly faster rate in May as demand remained strong, according to data from the Institute for Supply Management on Wednesday.

The data will help alleviate some of the concern over an imminent recession as our recent RSM US Manufacturing Outlook Index dipped into negative territory for the first time in the past two years.

The ISM manufacturing index rose to 56.1 from 55.4 in the prior month, marking the 24th month in a row of expansion since May 2020. A reading above 48.7 for the overall index indicates an expansion in the long run.

The increase was fueled by strong demand as the new orders subindex grew faster at 55.1 compared to 53.5 in April. As a result, the production subindex also increased on the month to 54.2 from 53.6 a month earlier.

A lot of attention has been focused on the prices paid subindex in recent months as inflation remained a top concern. The series, despite easing in May to 82.2 from 84.6, stayed elevated compared to historical standards. Inventories also grew faster on the month, up to 55.9 from 51.6.

But not all of the subindexes were encouraging. Employment contracted for the first time since November 2020, down to 49.6—a sign of labor market moderation in the manufacturing sector. As demand remained strong, the backlog of orders subindex also grew faster on the month.

The takeaway

We expect the manufacturing sector to stay on a choppy yet downward run in the coming months as economic activities slow down. Whether that run will look more like a smooth one, back to the sustained long-run growth rate, or a steep decline will depend heavily on how the Fed reacts to inflation with rate increases.