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BLUE MONDAY: PMI WEAKENS, CONSTRUCTION SPENDING DIPS

Investors embarked on a new week and a new month with a handful of mostly downbeat economic data.

Right off the bat, the contraction of U.S. factory activity unexpectedly gathered momentum in May.

The Institute for Supply Management's (ISM) purchasing managers' index $(PMI.UK)$ USPMI=ECI shaved off 0.2 point to print at 48.5, one full point shy of the 49.5 consensus.

A PMI reading south of 50 indicates monthly contraction.

Wandering into the weeds, new orders, production and employment gained ground but remained in contraction land, supplier deliveries expanded at a faster pace, while new export orders and imports continued to suffer amid ongoing trade chaos.

Prices paid - an inflation predictor - cooled down 0.4 points to 69.4. This is still quite elevated, and worrisome to those watching for inflationary effects of Trump's tariffs.

"The dip in the headline index was entirely due to a 4.1-point plunge in the inventories index, to 46.7 from 50.8, indicating that companies are rapidly running down inventory in response to the tariff hit," writes Oliver Allen, senior U.S. economist at Pantheon Macroeconomics.

"Several of the industry-by-industry comments in the press release suggest that navigating tariff-related disruptions is putting a considerable burden on businesses, and that increased costs from the tariffs are being passed on in full, more or less, by suppliers."

Not to be ignored, S&P Global also released its final take on May manufacturing PMI USMPMF=ECI, which showed the sector rising 1.8 points from the April reading, but revised slightly lower from its advance "flash" take released a few weeks ago.

"While growth of new orders picked up and suppliers were reportedly busier as companies built up their inventory levels at an unprecedented rate," said Chris Williamson, chief business economist at S&P Global. "The common theme was a temporary surge in demand as manufacturers and their customers worry about supply issues and rising prices."

The S&P Global and ISM indexes differ from each other in the weight they apply to the various components (new orders, employment, etc).

Here's how closely the dueling PMIs agree (or not):

Finally, expenditures on construction projects USTCNS=ECI unexpectedly dropped by 0.4% in April, defying analyst expectations for a 0.3% rebound from March's 0.8% decrease.

Delving deeper into the Commerce Department's data, spending on residential projects, the erstwhile tentpole of U.S. construction spending, fell by 0.9%, extending March's 1.2% pullback. Year-on-year, residential construction outlays are down 4.8%.

"Residential investment is forecast to fall by 2.8% annualized in Q2," says Bernard Yaros, lead U.S. economist at Oxford Economics. "Housing construction will come under pressure this year from high mortgage rates, rising building costs, and greater competition from the resale market."

The private sector's construction outlays dipped 0.7%, while government-funded projects increased by 0.4%.

(Stephen Culp)

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