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Semiconductor Value Chain

ISM: U.S. Manufacturing Sector Contracts in May

02 June 2013

Activity in the manufacturing sector contracted in May for the first time since November 2012 and only the second time since June 2009, according to the Institute of Supply Management (ISM)’s latest manufacturing report. The report’s leading index, the PMI, registered 49 percent in May, a 1.7 percentage point decrease from April’s level of 50.7 percent.

Any number over 50 in the PMI represents expansion in the manufacturing sector; any number below, a contraction.

The report is disappointing in that the index dropped to the lowest level since 2009, said Bradley J. Holcomb, chair of the Institute for Supply Management Manufacturing Business Survey Committee. “On the other hand, I believe it is a pothole in the road. The same [ISM] panel in our April 30 Semiannual Forecast anticipated 4.8 percent growth for the whole year, so I think [May] is one data point for the year and I think we will recover from this.”

The electronics industry continues to be under pressure from the transition of consumer goods away from PCs toward smartphones and tablets. Six industries reported contraction in May: Miscellaneous Manufacturing; Transportation Equipment; Chemical Products; Plastics & Rubber Products; Computer & Electronic Products; and Primary Metals. “We are seeing isolated comments about government spending and the impact on electronics, but the trend is consistent with everything we've been seeing in the consumer [electronics] industry,” Holcomb said. “It’s still a very dynamic industry.

Holcomb noted that the overall price index was down for the month – a decrease of 0.5 percentage points to 49.5 percent — and that supplier inventories were up a bit. This is actually a positive trend, as the decrease provides the opportunity for suppliers to replenish their stock at slightly lower-than-usual rates. If the price index stays low for too long, it would indicate a softening of the economy, but an occasional decline could spur purchasing.

“The data indicates that customer inventories are also low,” Holcomb said, “which is a good sign – it creates a bit of a vacuum in which they may need to reorder.”

Overall, he said, the trends point to good inventory management practices in the manufacturing industry.

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