U.S. Manufacturing Sector Expanded for the Tenth Consecutive Month in May

The ISM Manufacturing Index dropped slightly to 59.7 in May from April's almost six-year high of 60.4 (unrevised); however, this still indicates that manufacturing in the US expanded for the tenth consecutive month (a reading above 50 signals growth). Market expectations were for a reading of 59.0. Economic activity in the U.S. manufacturing sector expanded in May for the tenth consecutive month. The new orders component was unchanged from April at 65.7 while production fell slightly to 66.6 from April's 66.9. Inflationary pressures eased in May with prices paid falling to 77.5 from April's 78.0 reading. Manufacturers' inventories contracted for the second consecutive month, but remained above the 42.6 threshold historically associated with expansion in overall manufacturing inventories. Employment in the manufacturing sector continues improve, because the jobs component rose for the third straight month to 59.8 from the previous month's reading of 58.5.

Today's ISM manufacturing report keeps the sector within expansionary territory and is consistent with our view that the U.S. economy continues to gain strength in the second quarter of 2010, although the pace of growth is expected to ease slightly from first quarter's 3.0% annualized rate to 2.8%. The strong showing in today's employment index also supports our view that the labour market is continuing to strengthen, and we expect that the Payroll report set to be released on Friday, June 4, 2010 will show its third consecutive, significant, monthly increase. The unemployment rate, however, still remains elevated, and overall economic activity is still only emerging from highly depressed levels. The significant amount of economic slack will keep inflationary pressures subdued and allow the Fed to keep monetary policy highly stimulative “for an extended period.” As a result, we continue to expect that the Fed will keep its target Fed funds rate in its current 0% - 0.25% range into the final quarter of this year.

In another report out today, U.S. construction spending increased for a second consecutive month in April, jumping 2.7% to pummel market expectations of a 0.1% rise. The monthly increase was the largest since August 2000. The strength came from both private spending (+2.9%) and public spending (+2.4%).