Two surveys recently released showed that the manufacturing sector continued to expand in May and will likely remain robust in the coming months. Last week, the Chicago PMI jumped 4.1 points to 68 in May. This was the strongest reading since July 1988. The increase was led by faster growth in production (up 6.3 to 71.1), new orders (up 9.3 to 74.4), prices paid (up 3.9 to 80), and employment (up 3.9 to 54.8). The rate of growth slowed in backlog (down 0.6 to 56.9), inventory (down 7.0 to 52.6), and supplier deliveries (down 0.9 to 68.8).

The national survey from the Institute of Supply Managers painted a similar picture. Although the headline number rose only 0.4 points and six of the ten sub-indexes declined, the survey showed that the momentum in the manufacturing sector continued to build. Seven of the ten sub-indexes remained above 60. Inventories continued to show contraction, customer inventories dropped 3.5 points in May to the lowest level since it was added to the survey in September 2001. The employment sub-index rose 4.1 points to 61.9, a 31-year high.

Construction spending increased more than economists expected in April. Additionally, March spending was revised higher. While residential spending showed the largest dollar increase ($6.2 million or 1.2%), lodging and health care both increased over 5%. On a year-over-year basis, residential spending increased 16.7%. Office construction spending showed the third consecutive month of a year-over-year gain. The office market appears to have stabilized, but far below the level of the late 1990s.

A few homebuilders released their net orders data this week that was consistent with the construction spending data. KB Home announced that second quarter net orders increased 28%. Lennar's results were not as impressive, but still rose 17% during the second quarter. Hovnanian net new contracts jumped 45%, with the dollar volume surging 62%. The average price of a home that a contract was signed vaulted 12.4% to $301,421 since the second quarter last year. The largest was 27.9% in the West with the Southwest region experiencing a 10.4% decline.

After poor auto sales for most of this year, car lots were overflowing with inventory. Automakers increased the incentives, which propelled auto sales in May. Auto sales rebounded strongly in May to a 17.8 million annualized rate, the fastest rate since August 2003. The average incentives increased 5.4% in May from April according to CNW/Marketing Research. GM continued to have the highest incentive at $4,322, but had the smallest increase, only 0.8%. Chrysler was only $1 behind at $4,321, up from $4,201 in April. Ford increased its incentives the most of the Big Three, up 4.3% to $4,297. While substantially below the domestic automakers, the Japanese automakers are starting to beef up their incentives. Toyota offered an average of $2,982, 13% more than last month. Honda raised incentives by 14% to $1,773 and Nissan increased incentives by 15% to $1,855. Besides manufacturer incentives, dealers added $1,509 on average. GM announced it will offer as much as $5,000 rebates on 2004 models for customers that already own on a GM vehicle.

Table below uses actual sales results for May. Some manufactures adjust their results based on the number of selling days in the month. This year there was one less selling day, so several manufactures reported slightly different results.

Foreign automakers again took market share again this month. Market share has eroded to 59.2% for the three domestic automakers. This is the second lowest market share for the Big Three, second only to August 2003, when Toyota overtook Chrysler for the number three spot.

Ford announced that it has not seen a "dramatic shift in buying patterns" due to the higher price of gasoline. However, A survey conducted by Harris Interactive and Kelley Blue Book Marketing Research found a different result. According to the survey, 22% of car buyers have already changed their mind on what vehicle they would purchase next. Additionally, Jeremy Anwyl, COO of Edmunds.com, said that consumer interest in smaller SUVs has increased on its site and predicts that there will be a substantial shift away from the large SUVs if gasoline prices remain at these levels.

The auto industry still has the looming problem of car buyers having negative equity. This is one of the main reasons the automakers are increasing incentives instead of lowering the price. The incentives are used to pay-down the existing loan, then the new loan is for the price of the new vehicle. Sometimes the new loan is even greater than the price of the car if the buyer owed more than the rebate could cover. Jerry Reynolds, managing partner of Prestige Ford and owner of two other dealerships in Dallas, was quoted in a recent Dallas Morning News story, 'Upside-down' drivers make industry dizzy, "But customers need that money [incentives] to put with their trade. Without incentives we can't trade with anybody." One on Reynolds' dealerships, Prestige Ford, conducted a survey that revealed that 81% of its customers were upside down by an average of almost $4,000.

The incentive spree that started after September 11, have pulled forward purchases and the automakers have refused to face the day of reckoning. Instead, they just keep piling on more incentives to maintain sales volumes. Even George Pipas, sales analysis manager at Ford, said that the incentives pulled forward about one million sales. He also said that, "If you don't view this as a concern now, you will have to double incentives in future years. Right now, today's incentives take care of the negative equity. But it's not a situation you want to have five or ten years from now." When the automakers decide to cut back on the incentives it is likely that sales will drop dramatically. A drop in auto sales will have larger ramifications throughout the manufacturing sector, which has benefited from higher production levels.