U.S. manufacturing continued to expand through May, though last month marked the sector’s slowest rate of expansion in nearly two years.

Business activity in United States manufacturing expanded at a significantly slower pace in May, following relatively strong performance in March and April, new data show. Although the manufacturing sector continued to expand in May, the growth rate experienced the largest single-month drop since 1984, marking the third consecutive month of slowdown and bringing the growth rate to its lowest level since September 2009.

According to the Institute for Supply Management’s (ISM) latest manufacturing Report on Business, U.S. manufacturing expanded for the 22nd consecutive month in May, reflecting growth in the overall U.S. economy, which grew for the 24th consecutive month.

The ISM purchasing managers’ index (PMI), a key monthly gauge of the manufacturing sector, fell to 53.5 in May, down from the 60.4 reading in April and marking the first time this year the PMI has fallen below 60. The April PMI was well below the 12-month average of 57.7. Readings above 50 indicate growth.

Last month’s drop in the PMI was larger than expected, as economists polled by MarketWatch had forecast the PMI to fall to 57.1 in May.

“Slower growth in new orders and production are the primary contributors to this month’s lower PMI reading,” Bradley J. Holcomb, chair of ISM’s Manufacturing Business Survey Committee, said. However, “[m]anufacturing employment continues to show good momentum for the year, as the Employment Index registered 58.2 percent, which is 4.5 percentage points lower than the 62.7 percent reported in April. Manufacturers continue to experience significant cost pressures from commodities and other inputs.”

The historical relationship between the PMI and the broader U.S. economy signals that the average PMI of 59.5 for January through May corresponds to a 5.9 percent increase in real gross domestic product (GDP). At an annualized rate, the May PMI alone indicates a 3.8 percent yearly increase in real GDP.

Fourteen of the 18 industries tracked by ISM reported growth last month: nonmetallic mineral products; petroleum and coal products; machinery; transportation equipment; computer and electronic products; textile mills; electrical equipment, appliances and components; primary metals; miscellaneous manufacturing; paper products; chemical products; plastics and rubber products; apparel, leather and allied products; and fabricated metal products.

ISM’s new orders index dropped steeply from 61.7 in April to 51 in May, signaling that demand continues to grow but at a rapidly decreasing pace, while the production index declined from 63.8 to 54 over the same period. Supplier deliveries fell from 60.2 to 55.7, and inventories dropped from 53.6 to 48.7, the third contraction in four months.

“The weak data offered the latest evidence that the economy is hitting a second ‘soft patch’ nearly two years after the recession officially ended,” the Associated Press reports. “Although manufacturers in most industries reported growth in May, all said they felt squeezed by the rising costs of fuel, chemicals, metals and other inputs. High prices for oil and other commodities have also dampened consumer spending, which has led to less demand for factory goods.”

The ISM prices index fell from 85.5 in April to a still-high 76.5 in May, the first time the index has registered below 80 since December 2010. Materials costs remain problematic for many businesses, and various supply chain issues and shortages stemming from the natural disasters in Japan are likely to cause difficulties in the near-term future.

“Manufacturers that led the recovery as exports rose and business investment picked up are facing challenges from higher raw materials costs and the effects of Japan’s earthquake and tsunami,” Bloomberg News explains. “Deere & Co., the world’s largest farm-equipment maker, raised its 2011 earnings forecast less than analysts estimated as disruptions from Japan and costlier inputs lowered profit.”

Nevertheless, manufacturers generally remain optimistic about the future.

According to ISM’s recently released spring 2011 semiannual economic forecast, executives in the U.S. factory sector expect sales to rise 7.5 percent this year and expect to boost spending on new equipment by 17.9 percent. Twenty-three percent of manufacturers anticipate delays due to the disasters in Japan, while the remaining 77 percent foresee no problems due to supply constraints.

Earlier

Manufacturing Sector Continues Strong Growth

Manufacturing Expands at Slower Pace in April

Manufacturers More Optimistic about 2011

Resources

May 2011 Manufacturing ISM Report on Business
Institute for Supply Management, June 1, 2011

ISM Manufacturing Gauge Tumbles in May
by Jeffry Bartash
MarketWatch, June 1, 2011

May Manufacturing Activity Cooled to 20-Month Low
by Daniel Wagner
The Associated Press, June 1, 2011

Businesses Expand Less than Forecast, Chicago Index Shows
by Alex Kowalski
Bloomberg News, May 31, 2011