WASHINGTON -- The Purchasing Managers' Index for May surpassed many economists' expectations yesterday by surging to its highest level since July 1988.
The index reached 56.3%, up from 51.3% in April, which was the first month to post a decline since December, according to the National Association of Purchasing Management. A reading above 50% indicates the manufacturing is generally expanding, while a reading below 50% indicates no growth.
A barometer of the manufacturing sector, the index is considered a reliable leading indicator by many economists.
"The consensus forecast was a much more subdued number, 53.5%," said Irwin Kellner, chief economist with Chemical Banking Corp. "It's clearly saying that things continue to improve. You have to regard it as a significant number."
The index is based on a monthly survey of purchasing managers. The managers indicate whether activity at their companies is up or down compared with the previous month, according to Robert Bretz, chairman of the purchasing managements association. Activity is considered in terms of five categories: production, new orders, employment, inventories, and supplier deliveries.
"It's a very strong number, especially if you look at the sub-components," said Henry Willmore, an economist at Chase Manhattan Bank.
Mr. Willmore said that if the index stays at its current level, the economy would be growing at a rate between 3.5% and 4.5%, rather than between 2.5% and 3.0% as economists now forecast.
However, Mr. Willmore said he is not scrambling to revise his gross domestic product forecast for the second quarter because the economy is not doing as well as the index indicates.
The 56.3% reading "is not a aberration, but I would say it is a bit stronger than the overall trend of the economy," he said.
Nonetheless, Mr. Willmore said the favorable May index gives him more confidence in his prediction of 2.5% to 3.0% growth through the remainder of the year. He said he would consider revising his growth forecast upward if improvements come in employment, retail sales, and business inventories.
"This index is not a bolt out of the blue. It should put to rest anyone's doubts about the recovery," said Mr. Kellner. But he said this is only one piece of a slowly improving economic puzzle.
Ian Borsook, an economist with Merrill Lynch, agreed with Mr. Kellner, saying the May index "was a little better than expected, but there are so many other things out there that are quite weak but improving slowly."
Like Mr. Willmore, Mr. Borsook said one month's improvement was not enough to prompt him to revise his GDP growth forecast, which currently stands at 3.0% growth per quarter for the remainder of the year.
Meanwhile, opinions differ on the index's impact on future Federal Reserve actions.
"For the Fed, it's steady as she goes for another month or so," as a result of the improved index, Mr. Kellner said.
However, both Mr. Willmore and Mr. Borsook said the Fed could ease again if other indicators do not start to improve.
"It wouldn't take much to push [the Fed] into easing again. You could have a situation where the data will look weak for an extended period," Mr. Willmore said.
But Mr. Willmore also said the improved index reduces chances of the Fed easing again.
Unlike the Purchasing Managers' Index, other indicators released yesterday show the economy is still struggling.
The Commerce Department reported that personal income edged up 0.1% in April, while personal spending advanced 0.3%.
The department also reported that construction spending lost 0.3% in April, the first fall since November. The drop was due to a 1.1% decline in non-residential construction and a 2.6% drop in government construction spending.