Levels higher than 50 signal manufacturing growth, while readings below 50 indicate contraction.
"All in all, this is a very good sign for the overall economy and suggests sustainable growth in the manufacturing sector in the U.S.," said John Silvia, chief economist at Wells Fargo.
May's manufacturing activity was largely driven by an uptick in employment and continued strength in production and new orders, said ISM chairman Norbert Ore in a prepared statement.
Inventory drop: The slight slowdown in manufacturing growth from the previous month was due to a sharp decrease in inventory levels, said Silvia.
ISM's inventory index fell for a second consecutive month to 45.6 in May from 49.4 in April, with eight out of the 18 industries surveyed reporting drops in inventory.
"What happened is the inventory number came down, so inventory rebuilding is falling, which is part of a correction to an inventory buildup," he said. "But everyone was worried that with the inventory reduction, everything else would come down too, so the fact that that's not the case is a very good sign."
Of the 18 industries surveyed, the only sector that reported a slowdown in growth in May was the petroleum and coal products industry, the report showed.
Sixteen of the 18 industries reported expansion. Growth in the paper products, wood products, transportation equipment and electrical equipment industries increased the most in May.
New orders and production: ISM's index of new orders remained steady at 65.7 in May, marking the eleventh month of growth, while the institute's production index edged lower to 66.6 in May from 66.9 in April.
While the production index was lower, it still marked the 12th consecutive month of growth, and 15 industries reported expansion, led by the wood and paper products sector.
Employment: The employment index ticked up to 59.8 in May from 58.5 in April, the index's sixth month of growth.
Twelve of the 18 industries surveyed reported increased employment in May, led by the petroleum and coal products, paper products, transportation equipment and fabricated metal products sectors.
Given the overall trend of manufacturing growth over the past 10 months, and with May's increase in employment, Silvia said he expects activity in the sector to continue to expand.
"We should definitely see continued growth as the economy improves," said Silvia. "It may not move ahead as fast as some people would like, but its getting there."
The monthly report surveys ISM members, who are purchasing managers in the manufacturing industry. The index tracks new orders, production, employment, supplier deliveries, inventories, customers' inventories, backlog of orders, prices, new export orders, imports and buying policies.
TN faces a slow economic recoveryManufacturing (ISM)
