ISM: Manufacturing Hits A High Note
Economic activity in the manufacturing sector expanded in August for the third consecutive month, and the overall economy grew for the 51st consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
“The ISM index increased slightly in August from an already elevated level in July and points to a sharp pickup in manufacturing production,” noted Dan Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation. “Unfortunately, a strong production rebound is not yet seen in governmental statistical data. The index was 55.7 in August, up from 55.4 in July, but the index averaged only 50.2 in the April to June period. An index of 50 is the dividing line between growth and decline. The August report reveals a surge in new orders and fast growth in manufacturing production. Only 12 percent of the monthly reports over the last 20 years had a production index at or above the August level (of 62.4).
“The ISM report suggests that the Fed’s industrial production statistics have not picked up the rebound in July and will be revised upwards substantially in a few weeks when August production is announced,” Meckstroth predicted. “MAPI believes a rebound in industrial activity is underway and manufacturing production is accelerating. The pickup is driven by strong growth in new housing starts that creates demand for construction materials. Also, firms are taking advantage of ultra-low interest rates, while they last, and investing in business equipment, especially private transportation infrastructure (railroad, trucks, aerospace). The main drag on the economy remains government austerity.”
The PMI registered 55.7 percent, an increase of 0.3 percentage point from July’s reading of 55.4 percent. August’s PMI reading, the highest of the year, indicates expansion in the manufacturing sector for the third consecutive month.
“Two months of strong numbers back-to-back is a good start the third quarter and second half of the year,” says Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee. “Being up .3 percentage points gives us a high number for the year, like last month’s number was as well.”
Orders, Production and Inventory
ISM’s New Orders Index registered 63.2 percent in August, an increase of 4.9 percentage points when compared to the July reading of 58.3 percent. This represents growth in new orders for the third 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 62.4 percent in August, which is a decrease of 2.6 percentage points when compared to the 65 percent reported in July. This month’s reading indicates growth in production for the third consecutive month. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
“Twelve of our 18 industries are reporting growth in new orders, particularly among the sectors that relate to housing and autos, but also computers,” adds Holcomb. “While production is down 2.6 percentage points, it is still very strong above 60 percent. Last month’s index number of 65 percent was just not sustainable, nor should it be. I would focus on the fact that production is growing at 62.4 percent rather than the fact that it’s down a little bit from last month.”
The Inventories Index registered 47.5 percent in August, which is 0.5 percentage point higher than the 47 percent reported in July. This month’s reading indicates that respondents are reporting inventories contracted in August for the second consecutive month. For the first eight 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).
“At 47.5, the Inventories Index is relatively flat from last month,” explains Holcomb. “It is contracting and it’s impacted by two things: One is strong production eating into inventories. Second is supplier deliveries that are slowing because suppliers are having a hard time catching up to fill and replace inventories. Those factors are why inventories are below 50, but it is certainly within a well-managed range given all of that.”
ISM’s Backlog of Orders Index registered 46.5 percent in August, which is 1.5 percentage points higher than the 45 percent reported in July. This is the fourth consecutive month of contracting order backlogs. Of the 85 percent of respondents who reported their backlog of orders, 16 percent reported greater backlogs, 23 percent reported smaller backlogs and 61 percent reported no change from July.
Exports, Imports and Prices
ISM’s New Export Orders Index registered 55.5 percent in August, which is 2 percentage points higher than the 53.5 percent reported in July. This month’s reading represents the ninth consecutive month of growth in new export orders.
ISM’s Imports Index registered 58 percent in August, which is 0.5 percentage point higher than the 57.5 percent reported in July. August’s reading reflects the highest level of imports since April 2010, when the reading was also 58 percent. This month’s reading also represents the ninth consecutive month that the Imports Index has registered at or above 50 percent.
“The strong imports number is all about the import of raw materials,” says Holcomb. “Manufacturing in the chemical products area is benefiting from the Yen taking a 20 percent decrease. The resulting prices certainly encourage imports of materials. On the other side, the export of finished goods is up 2 percentage points, showing that the global economy is working well and participating in U.S. manufacturing. As we look around the world, the PMI in China is up over 50 and even the Eurozone PMI is up. Manufacturing, generally speaking, seems to be on a positive note with the U.S. leading the way.”
The ISM Prices Index registered 54 percent in August, which is an increase of 5 percentage points compared to the July reading of 49 percent. The Prices Index has alternated between price increases and price decreases for the last four months, with August indicating an increase in the price of raw materials. In August, 21 percent of respondents reported paying higher prices, 13 percent reported paying lower prices, and 66 percent of supply executives reported paying the same prices as in July. 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 indifferent right now,” explains Holcomb. “It’s been up and down across the 50 percent mark consecutively for at least the last 4 months. I’m not really finding a trend, which is fine. That means prices are in control, they’re in check, there’s no concern about inflation and increases are only coming in limited areas like corrugated packaging, oil/oil-based products and steel — which uses a lot of energy.”
ISM’s Employment Index registered 53.3 percent in August, which is 1.1 percentage points lower than the 54.4 percent reported in July. This month’s reading indicates expansion in employment for the second consecutive month. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the BLS data on manufacturing employment.
“Employment numbers go up and down,” says Holcomb. “What I like is that it’s well above 50 at 53.3 percent. For manufacturing, this says that employers are willing to hire and replace jobs — and they do that in anticipation and continuation of new orders, so that’s a good sign.”
We’re still in a slow recovery period and there are things to be concerned about if they materialize, such as issues in the Middle East and Federal government spending. So manufacturing is not out of the woods yet, but nevertheless, two solid months to start the second half is a good sign.
“One comment I found quite interesting in the furniture and related products industry indicated that things are slowing down slightly, but still stronger than last year by 20 percent,” adds Holcomb. “That’s a really strong message when you look at it. There’s still a little bit of up and down in the industry and mixed reviews are reminding us that not everybody is out of the woods yet. We’ll just have to see what the coming months have to bring.”
This month’s report is a well-balanced view and continuation of what manufacturing saw in July. It’s consistent with what ISM’s panel forecasted for the year as recently as late April.
“We’re definitely looking at a good second half of the year and we’ve got a pretty good start to that,” explains Holcomb. “I think it’s solid and balanced with a lot of industries reporting growth, new orders and solid production.”
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.