Economic activity in the manufacturing sector contracted in December for the second consecutive month, while the overall economy grew for the 79th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Manufacturing Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (51.4 percent) corresponds to a 2.6 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for December (48.2 percent) is annualized, it corresponds to a 1.6 percent increase in real GDP annually.”
A PMI above 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December PMI indicates growth for the 79th consecutive month in the overall economy, while indicating contraction in the manufacturing sector.
“2015 was certainly a slow growth year for manufacturing, ending on a slow note with the last two months in the contraction territory,” adds Holcomb. “We’ll just have to wait and see where we go from here, but hopefully we found bottom.”
Orders, Production and Inventory
ISM’s New Orders Index registered 49.2 percent in December, an increase of 0.3 percentage point when compared to the November reading of 48.9 percent, indicating contraction in new orders for the second consecutive month. A New Orders Index above 52.1 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 49.8 percent in December, which is an increase of 0.6 percentage point when compared to the 49.2 percent reported in November, indicating contraction in production for the second consecutive month. An index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
“Both New Orders and Production indexes are below 50 which is less than desirable, but they’re heading in the right direction,” says Holcomb. “In terms of new orders, seven out of 18 industries are reporting growth with 11 reporting a decrease — so it’s out of balance. I think it’s a year-end thing where people didn’t shop as much as expected and, in the end, it’s all about consumer activity.”
The Inventories Index registered 43.5 percent in December, which is 0.5 percentage point higher than the November reading of 43 percent, indicating raw materials inventories are contracting in December for the sixth consecutive month. An Inventories Index greater than 42.9 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).
“Inventories were planned down to this level in order to close the books at yearend with as low numbers as practical,” explains Holcomb. “Because there’s a lot of cash tied up in inventories and it’s beneficial to profitability to reduce inventories.”
ISM’s Backlog of Orders Index registered 41 percent in December, a decrease of 2 percentage points as compared to the November reading of 43 percent. Of the 88 percent of respondents who measure their backlog of orders, 12 percent reported greater backlogs, 30 percent reported smaller backlogs, and 58 percent reported no change from November.
Exports, Imports and Prices
ISM’s New Export Orders Index registered 51 percent in December, which is an increase of 3.5 percentage points when compared to the November reading of 47.5 percent, and indicates a return to growth in new export orders following six consecutive months of contraction in the New Export Orders index.
“Exports are moving directionally up,” says Holcomb. “With exports only expanding one or two months this year, I feel like there is some pent-up demand for our finished products from abroad.”
ISM’s Imports Index registered 45.5 percent in December, which is 3.5 percentage points lower than the 49 percent reported in November, and indicates contraction in imports for the third consecutive month.
The ISM Prices Index registered 33.5 percent in December, which is 2 percentage points lower than in November, indicating a decrease in raw materials prices for the 14th consecutive month. This is the lowest reading since the Prices Index registered 32 percent in April 2009. In December, 4 percent of respondents reported paying higher prices, 37 percent reported paying lower prices, and 59 percent of supply executives reported paying the same prices as in November. A Prices Index above 52.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.
ISM’s Employment Index registered 48.1 percent in December, which is a decrease of 3.2 percentage points when compared to the 51.3 percent reported in November, indicating contraction in employment. An Employment Index above 50.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
“It was a disappointing year with reasons that are now behind us,” concludes Holcomb. “I’m hoping we found bottom in terms of manufacturing. I think we can remain hopeful for a good year, and let’s see what January has to offer.”
The monthly Manufacturing ISM Report on Business is 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 for Supply Management, visit www.ism.ws.