ISM: Manufacturing Dips, Remains In Positive Territory
Although U.S. manufacturing declined in March, it continues a positive push into 2013.
“The Institute for Supply Management (ISM) Index was 51.3 in March, down from 54.2 in February but is still above 50, the dividing point between growth and decline,” said Daniel J. Meckstroth, Chief Economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “It is clear that manufacturing activity surged this winter, but now that spring has arrived, the reality that there are many headwinds this year is starting to constrain the pace of growth. Consumers faced higher payroll taxes, gasoline prices rose, and wage and salary increases barely exceed the inflation rate. Firms could pick up the pace of investment spending but the budget battles in Washington, where austerity and sequestration are the main issues, have created enough uncertainty to keep a lid on new investments.”
The PMI registered 51.3 percent, a decrease of 2.9 percentage points from February’s reading of 54.2 percent, indicating expansion in manufacturing for the fourth consecutive month, but at a slower rate. Both the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, registering 51.4 and 52.2 percent, respectively. The Employment Index registered 54.2, an increase of 1.6 percentage points compared to February’s reading of 52.6 percent. The Prices Index decreased 7 percentage points to 54.5, and the list of commodities up in price reflected far fewer items than in February. In addition, the Backlog of Orders, Exports and Imports Indexes all grew in March.
“The drop in the PMI expansion is a normal variation,” says Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Business Survey Committee. “If you look at the first three months of 2013 combined, we’re on a very good track. This is perhaps a little bit of a pause. Nevertheless that 51.3 says March grew, but just not at the rates that we saw on the first two months. In addition, a lot of the supporting metrics are in positive territory. For example, exports and imports are really really strong, showing the global economy is participating in a meaningful way.”
Orders, Production and Inventory
ISM’s New Orders Index registered 51.4 percent in March, a decrease of 6.4 percentage points when compared to the February reading of 57.8 percent. This represents growth in new orders for the third consecutive month. 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 52.2 percent in March, which is a decrease of 5.4 percentage points when compared to the 57.6 percent reported in February. This indicates growth in production for the seventh 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.
“New orders are down a bit more than I would like to see,” adds Holcomb. “If you look at the specifics, 12 industries are showing growth in new orders and only two are reporting a decrease which means several are holding at 50 or above. The decrease in these indexes is not attributed to one specific thing. I think it's fairly broad support for growth, just not as strong as we saw on the first couple of months. That's not necessarily a bad thing because we can't sustain continuous climbing. It's more realistic to expect you can have some ups and downs along the way and hopefully not across the 50 line, but I don't see that at all at this point.”
The Inventories Index registered 49.5 percent in March, which is 2 percentage points lower than the 51.5 percent reported in February. This month’s reading indicates that respondents are reporting inventories are contracting in March, following two consecutive months of growth. 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 inventory index doesn’t indicate anything except for good inventory management,” explains Holcomb. “I would expect to see it a little bit below 50 percent for most of the year. That's on purpose as people want to contain costs and avoid getting caught with obsolete inventories.”
ISM’s Backlog of Orders Index registered 51 percent in March, which is 4 percentage points lower than the 55 percent reported in February. This is the second month of growth in order backlogs since March 2012, when the index registered 52.5 percent. Of the 85 percent of respondents who reported their backlog of orders, 22 percent reported greater backlogs, 20 percent reported smaller backlogs, and 58 percent reported no change from February.
Exports, Imports and Prices
ISM’s New Export Orders Index registered 56 percent in March, which is 2.5 percentage points higher than the 53.5 percent reported in February. This month’s reading represents the fourth consecutive month of growth in new export orders, and follows six months of contraction dating back to June 2012.
ISM’s Imports Index registered 54 percent in March, which is the same reading as reported in February. This month’s reading indicates that import levels are growing for the third time in the past four months.
“The ISM index for exports did pick up in March,” Meckstroth added, “but it is hard to believe that net exports are driving manufacturing growth when Europe and Japan are in recession and China is just starting to accelerate after a growth slowdown last year. MAPI predicts that manufacturing production will perform only slightly better than overall GDP growth this year. Manufacturing industrial production is forecast to increase 2.2 percent in 2013 and accelerate to 3.6 percent growth in 2014.”
The ISM Prices Index registered 54.5 percent in March, which is a decrease of 7 percentage points compared to the February reading of 61.5 percent. In March, 21 percent of respondents reported paying higher prices, 12 percent reported paying lower prices, and 67 percent of supply executives reported paying the same prices as in February. 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.
“I think the decrease in prices is good and it's also consistence with our December forecast,” says Holcomb. “Prices will, on the whole for the year, increase about 2 percent. The comments this morning that inflation is in check, I think that is correct, and this is another indication of that.”
ISM’s Employment Index registered 54.2 percent in March, which is 1.6 percentage points higher than the 52.6 percent reported in February. This month’s reading indicates growth in employment for the 42nd consecutive month. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
“Employment numbers show continuing confidence on the part of manufacturing,” explains Holcomb. “It indicates that manufacturers are continuing to hire. They don’t want to get caught short staffed for what they anticipate in terms of new orders coming down the pike. I think that it's a reflection of optimist on their part.”
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.