Manufacturing continued to improve in May, but the economic recovery may be slowing according to the Institute for Supply Management (ISM). Almost all of its report's indices showed things getting better last month, but possibly not quickly enough to provide for that v-shaped recovery that so many are hoping for.

It's probably easiest to start by presenting its chart of indices:

ism matrix 2010-05.PNG

As you can see, almost every indicator shown is growing. The few outliers include deliveries and inventories. In fact, inventories dropped a significant 3.8%. This decline likely shows manufacturers are continuing to allow their stocks to decline as the economy strengthens, rather than hire in proportion to the greater demand. So even though this is bad news presently -- because it indicates that manufacturers haven't brought on enough new workers -- as the economy continues to strengthen, these jobs will have to follow. Inventories can only go so low.

Since inventories are being drained, it makes sense that supplier deliveries slowed in May. If new manufacturing isn't keeping up with demand, then fewer deliveries are necessary as output growth is stunted. This indicator will also improve when inventories get replenished.

Of the indices growing, three are doing so faster and four slower. If you consider which are which, then you quickly conclude that this is not wonderful news. Employment and exports are two of those growing faster. The first is a lagging indicator, so this is expected and tells us little about where the economy is headed. Faster export growth, while good, may suffer if Europe continues to struggle with its fiscal health. The other is the backlog of orders, which can probably be explained by manufacturers' failure to hire as quickly as orders come in -- so may say nothing about additional future demand.

Meanwhile, production is growing more slowly and the growth of new orders is flat. This might indicate that the recovery has peaked. Some of the others indicators with slowing growth, including prices and imports, probably aren't much to worry about, however.

Overall, this report says that the manufacturing economy continued to improve in May, but the recovery may be nearing a plateau.

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