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ISM: Manufacturing Surges Ahead

Tue, 08/06/2013 - 8:02am
Jon Minnick, Associate Editor, Manufacturing Business Technology

Economic activity in the manufacturing sector is at its highest levels since June 2011, say the nation’s supply executives in the latest Manufacturing Institute for Supply Management (ISM) Report On Business.

“The Institute for Supply Management (ISM) index jumped upward in July from what was a relatively flat period of production in manufacturing during the second quarter of this year,” says Daniel Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “The index was 55.4 in July and averaged 50.2 in April to June; 50 is the dividing line between growth and decline. The July report is particularly comforting because the future direction for manufacturing activity had been uncertain while the overall economy struggled to achieve very modest growth in the first half.

“A surge in production and new orders in July, as indicated in the report, gives growth momentum to the sector and confirms our forecast of an acceleration in manufacturing activity in the second half of 2013,” adds Meckstroth. “Firms are taking advantage of ultralow interest rates (while they last) and investing in business equipment. There remains pent-up demand for housing and motor vehicles, driving manufacturing growth. In addition, private transportation infrastructure (railroad, trucks, aerospace) is seeing new investment.”

The PMI registered 55.4 percent, an increase of 4.5 percentage points from June’s reading of 50.9 percent. June’s PMI reading, the highest of the year, indicates expansion in the manufacturing sector for the second consecutive month.

Holcomb“It’s a great way to start the second half of 2013,” says Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee.  “I think it’s a very positive and well-balanced report in terms of all of the underlying metrics. Things are pointing in a very favorable direction right now.”

Orders, Production and Inventory

ISM’s New Orders Index registered 58.3 percent in July, an increase of 6.4 percentage points when compared to the June reading of 51.9 percent. This represents growth in new orders for the second consecutive month, and is also the highest reading for the index since April 2011, when the index registered 63.8 percent. A New Orders Index above 52.2 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).

ISM’s Production Index registered 65 percent in July, which is an increase of 11.6 percentage points when compared to the 53.4 percent reported in June. This month’s reading indicates growth in production for the second consecutive month, and is the highest reading since May 2004, when the index registered 65.3 percent. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

“New orders numbers are coming from nine industries including furniture and related products; electrical equipment and appliances related to the housing industry; and also food, beverage and tobacco — which haven’t been all that strong this year,” adds Holcomb. “Computer and electronic products, which have been under pressure for a while, are now responsible for some of these new orders.”

The Inventories Index registered 47 percent in July, which is 3.5 percentage points lower than the 50.5 percent reported in June. This month’s reading indicates that respondents are reporting inventories contracted in July, following one month of growth. For the first seven months of 2013, inventories of raw materials have registered in a well-managed range from a high of 51.5 percent in February to a low of 46.5 percent in April. An Inventories Index greater than 42.7 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis’ (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).

“The dip in the Inventories Index is a natural consequence of the strong production number, using up inventoriesand also working off some of the backlog of orders,” explains Holcomb. “That lower index number is a natural consequence.”

ISM’s Backlog of Orders Index registered 45 percent in July, which is 1.5 percentage points lower than the 46.5 percent reported in June. This is the third consecutive month of contracting order backlogs. Of the 86 percent of respondents who reported their backlog of orders, 15 percent reported greater backlogs, 25 percent reported smaller backlogs and 60 percent reported no change from June.

Exports, Imports and Prices

ISM’s New Export Orders Index registered 53.5 percent in July, which is 1 percentage point lower than the 54.5 percent reported in June. This month’s reading represents the eighth consecutive month of growth in new export orders, and follows six consecutive months of contraction dating back to June 2012.

ISM’s Imports Index registered 57.5 percent in July, which is 1.5 percentage points higher than the 56 percent reported in June. This month’s reading represents the eighth consecutive month that the Imports Index has registered at or above 50 percent.

“The increase in imports reflects favorable pricing of raw materials from overseas,” says Holcomb. “The slight decline in exports really doesn’t mean a lot. It’s still really healthy and has been positive for eight consecutive months now — just at a little slower rate this month relative to last month. Overall between the two, it shows a healthy global economy with products and raw materials flowing back and forth.”

The ISM Prices Index registered 49 percent in July, which is a decrease of 3.5 percentage points compared to the June reading of 52.5 percent. This indicates that raw materials prices decreased in July, as they did in May, while the other five months of 2013 registered price readings at or above 50 percent. In July, 20 percent of respondents reported paying higher prices, 22 percent reported paying lower prices, and 58 percent of supply executives reported paying the same prices as in June. A Prices Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices

“The Prices Index number is kind of indifferent right now,” explains Holcomb. “It’s been bouncing around a little bit and if you look at our commodities coming down in price, you’ll see things that are really both up and down.  In the short term, it’s good news and allows manufacturers to buy inventories at lower prices. Sustaining it at a level below 50 for a long term speaks to broader demand being soft, which we don’t want. So this is fine for now, but we’ll look forward to it increasing above 50.”

Employment

ISM’s Employment Index registered 54.4 percent in July, which is 5.7 percentage points higher than the 48.7 percent reported in June. This month’s reading indicates a return to expansion in employment, following only two months of contraction in the past 47 months. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the BLS data on manufacturing employment.

“The Employment Index is strong — perhaps stronger than one would have expected,” says Holcomb. “The fact that it’s back in positive territory is really no surprise. We had just one monthof it dropping below 50 and that broke a long-standing 4-year run. This is a good solid number, but back where we expected in positive territory.”

Overall Results

The responses from participates in the ISM report are, generally speaking, along the lines of steady to continued demand with slightly improving conditions. They’re not really overly enthusiastic which provides a balance to this overall report. The numbers are so strong, but the comments reflect some healthy reservation about manufacturing not getting ahead of itself. Nevertheless, most of the industries talk about stable to steady increasing business conditions.

“I don’t think people should get overly optimistic by just this one month of data,” explains Holcomb. “I would expect it to come down just a little bit, but certainly remain in the solid, low to mid 50s territory. This, perhaps, is to some degree a reflection of pent-up demand from earlier in the year, as well as anticipating a good second half of the year.”

In his role as the chair of the Institute for Supply Management Manufacturing Business Survey Committee, Bradley J. Holcomb writes the monthly Manufacturing ISM Report on Business based on the survey results of approximately 350 professionals across 18 different industry sectors. The report is released on the first business day of each month, and features the PMI Index as its key measure. For more information on the Institute of Supply Management, visit www.ism.ws.

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