Minnesota and national monthly manufacturing indexes improve but still at recessionary levels

Monthly manufacturing reports for Minnesota, the Midwest and the nation are still in recessionary territory for May, but surveyed factory managers also expressed optimism that it will continue on an upward swing.

In Minnesota, the index increased from 34.8 in April to 39.8 in May. An index of 50 is neutral. New orders, though, were on the low side, according to Creighton University's survey of Mid-America manufacturers.

The overall nine-state index improved to 43.5 from 35.1 in April.

The survey's confidence index improved, though, to suggest that businesses are optimistic the economy will begin to rebound within the next six months. That index improved to 56.6 in May from April's weak 45.5 reading.

Creighton economist Ernie Goss said the survey shows the coronavirus outbreak has had a greater impact on businesses tied directly to the consumer and a smaller impact on manufacturers.

"This is a consumer-led recession with manufacturing lagging. Nonetheless, Creighton's survey indicates that the regional manufacturing sector is trapped in a recession," said Goss, who oversees the survey.

Manufacturers were stung by a deep demand downturn after COVID-19 struck the U.S. The slump was exacerbated by stay-home orders that shut some of them down, plus higher costs in both shipping and keeping their employees safe from the coronavirus.

Goss added that the federal stimulus plan, Federal Reserve incentive programs and the U.S. stocks rebound all boosted confidence.

Goss said that before the coronavirus outbreak took hold in mid-March there were only 160,170 workers in the region receiving unemployment benefits. By early May, that number soared to more than 1.3 million workers.

Besides Minnesota, the Creighton survey covers the Dakotas, Arkansas, Iowa, Kansas, Missouri, Nebraska and Oklahoma.

U.S. manufacturing activity eased off an 11-year low in May, though the recovery from the pandemic could take years because of high joblessness.

The Institute for Supply Management (ISM) said on Monday that its index of national factory activity rose to a reading of 43.1 in May, from 41.5 in April, which was the lowest level since April 2009.

The survey's inflation index increased to 48.6 in May from April's 44, but still indicated wholesale prices are declining.

The first increase in the ISM index since January mirrored improvements in regional manufacturing surveys in May and suggested April was the nadir for economic activity. At least 21.4 million jobs were lost been March and April.

However, Thomas Simons and Aneta Markowska of Jefferies said in a research note that the movement in the manufacturing economy was in the right direction but "hardly anything to get excited about.

"Because of its construction [it's a diffusion index that measures breadth, not magnitude of economic shifts], the ISM index will probably improve materially in June as factories begin to reopen and as Boeing resumes production of the 737 MAX after a prolonged layoff," Simons and Markowska said. "However, a return to pre-COVID levels of manufacturing output will take much longer, and will be measured in quarters, not months."

The economy contracted at a 5% annualized rate in the first quarter. Gross domestic product is expected to decline at a rate as sharp as 40% in the second quarter, which would the biggest contraction in output since the Great Depression on the 1930s.

The ISM's forward-looking new orders sub-index increased to a reading of 31.8 in May from 27.1 in April, which was the lowest since December 2008.

Includes reporting from Associated Press and Reuters.