United States manufacturing grew for the 10th consecutive month in May, albeit at a slightly slower pace, according to the Institute for Supply Management's latest manufacturing ISM Report on Business. The ISM index of U.S. manufacturing fell from 60.4 in April — a six-year high — to 59.7 last month.

The ISM tracks the breadth of growth across firms, surveying purchasing managers on whether business grows or contracts each month. Readings higher than 50 signal manufacturing growth, while readings below 50 indicate contraction.

Although expansion among the nation's factories was slightly slower than in April, the monthly report on Tuesday shows underlying strength in the manufacturing sector.

At 59.7, the index is at "an elevated level similar to what was seen in late 2003 when the manufacturing sector broke out of the 2001 recession," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, said in an analysis of the ISM report.

Sixteen of the 18 industries that ISM tracks were growing in May. Growth in the paper products, wood products, transportation equipment and electrical equipment industries showed the largest monthly increases. The petroleum and coal products industry was the only sector that reported a slowdown in growth in May.

"The rate of growth as indicated by the PMI is driven by continued strength in new orders and production," Norbert J. Ore, chair of the ISM Manufacturing Business Survey Committee, said in a statement.

ISM's new orders index held steady at 65.7 percent in May, the same rate of growth reported in April and the 11th consecutive month of growth in the index.

The production index dropped from 66.9 to 66.6 in May. Although lower than April, May's production index still marked the 12th consecutive month of growth.

Meckstroth also cited "strong gains in exports" as a key reason for "the strong and quick industrial rebound in this cycle."

Meanwhile, new export orders were very strong again: ISM's index of new export orders registered 62 in May, up from 61 in April and the 11th consecutive month of growth in the index. "Export orders were the highest since December 1988," Reuters notes.

"There is a post-financial crisis global recovery in foreign trade coupled with a large domestic inventory swing which accounts for the very broad-based recovery in manufacturing activity and the upward price pressure in raw materials," Meckstroth said.

The prices-paid index fell from 78 to 77.5, with 60 percent of respondents having paid higher prices in May, 5 percent having paid lower prices and 35 percent of supply executives having paid the same prices as in April.

"A corroborating indicator of the strength in the manufacturing rebound is the fact that respondents to the ISM survey are so bullish on job growth in a sector that is not known for job creation," Meckstroth added.

The employment index rose from 58.5 in April to 59.8 last month, "the highest level since May 2004," MarketWatch reports. Twelve of the 18 industries surveyed reported increased employment in May, led by the following sectors: petroleum and coal products; paper products; transportation equipment; fabricated metal products; and printing and related support.

Manufacturers have added to payrolls for six consecutive months, according to Ore.

Joel Naroff, president of Naroff Economic Advisers, told MarketWatch that "firms are probably having trouble meeting their schedules out of production and are having to grab stuff off the shelves.

"They will have to restock and that should lead to even more production and hiring," according to Naroff.

"The supply chain pipeline is filling with orders and manufacturing firms are reluctantly, but out of necessity, adding staff," Meckstroth said.

CNN Money reports that "the slight slowdown in manufacturing growth from the previous month was due to a sharp decrease in inventory levels."

The manufacturers' inventories index fell for a second consecutive month in May, from 49.4 to 45.6. Eight of the 18 industries surveyed reported drops in inventory.

Meanwhile, the customers' inventories index decreased from 33 in April to 32 in May, marking the 14th month in a row that the Index has been below the 50 percent threshold and indicating that the nation's purchasing managers believe their customers' inventories are currently too low.

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Resources

May 2010 Manufacturing ISM Report on Business
Institute for Supply Management, June 1, 2010

MAPI Analysis on ISM Report: Manufacturing Rebound Shows Strength
by Daniel J. Meckstroth
The Manufacturers Alliance/MAPI, June 1, 2010

Manufacturing Expands for 10th Straight Month
by Lucia Mutikani
Reuters, June 1, 2010

Factory Sector Activity Slightly Off Highs in May
by Greg Robb
MarketWatch, June 1, 2010

Manufacturing Growth Slows
by Blake Ellis
CNNMoney.com, June 1, 2010