Economy Contracting at a Slower Pace

(Houston, Texas) – According to Houston area supply chain executives, economic activity in Houston contracted at a slower pace in May than it did in April. Overall economic activity has now contracted for three months.

The Houston Purchasing Managers Index rose 5.6 points to 40.2 in May. Two of the three underlying indicators that have a strong direct correlation with the economy, sales/new orders and employment, improved but continue to point to contraction. The third, lead times, is giving what is believed to be a contradictory signal of near term modest expansion, however, this signal for improvement is most probably caused by supply chain disruptions rather than a supply shortages. The sales/new orders index rose 15.2 points to 36.4. The employment index rose 8.1 points to 38.1. The lead times index fell 5.6 points to 51.5. The underlying indicator that has the strongest inverse correlation with economic activity, finished goods inventory, rose an additional 12.5 points this month to 63.6, its highest level on record.

The three-month forecast for the Houston PMI rose 3.8 points to 45.7. This was primarily driven by an increase in the sales/new orders index with a negative offset caused by a lower lead times index. These indices have a strong direct correlation with economic activity at the three-month forecast horizon.

On an industry specific basis, no sector reported expansion this month. Transportation, utilities, wholesale trade, health care, and real estate reported near neutral. Oil & gas, construction, manufacturing, professional services, and accommodations/food services all reported significant weakness. From a three-month forecast standpoint, all sectors are anticipated to show moderate to strong improvement if the economic impact of the COVID-19 virus continues to improve.

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