U.S. manufacturing slumps further in May; employment picks up -ISM

WASHINGTON (Reuters) - U.S. manufacturing contracted for a seventh straight month in May as new orders continued to plummet amid higher interest rates, but factories boosted employment to a nine-month high.

The Institute for Supply Management (ISM) said on Thursday that its manufacturing PMI fell to 46.9 last month from 47.1 in April. It was the seventh straight month that the PMI stayed below the 50 threshold, which indicates contraction in manufacturing, the longest such stretch since the Great Recession.

The persistent weak readings in the PMI support analysts' expectations that the economy will slip into recession this year. But there have been several periods, including the mid-1990s as well as mid- and late-1980s when prolonged readings of the PMI below 50 were not accompanied by a recession.

Economists polled by Reuters had forecast the index dipping to 47.0 in May.

Manufacturing, which accounts for 11.3% of the economy, has been depressed by rate hikes worth 500 basis points from the Federal Reserve since March 2022, when the U.S. central bank embarked on its fastest monetary policy tightening campaign since the 1980s to tame inflation.

Banks have also tightened lending following the recent financial market turmoil, while spending is shifting to services and away from goods, which are typically bought on credit.

Businesses carefully managing inventories are also adding to the pressure on manufacturing. Business inventories increased at their slowest pace in 1-1/2 years in the first quarter.

The ISM survey's forward-looking new orders sub-index dropped to 42.6 last month from 45.7 in April.

With demand weakening, inflation at the factory gate was subdued. The survey's measure of prices paid by manufacturers decreased to 44.2 from 53.2 in the prior month.

The battle against inflation has shifted to services, where prices remain elevated.

The survey's gauge of factory employment increased to 51.4 from 50.2 in April. That suggests further gains in manufacturing payrolls in May after they rebounded in April.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)