Economic activity in the manufacturing sector expanded in March for the 27th consecutive month, and the overall economy grew for the 70th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Manufacturing expanded in March as the PMI registered 51.5 percent, a decrease of 1.4 percentage points when compared to February’s reading of 52.9 percent, indicating growth in manufacturing for the 27th consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through March (52.6 percent) corresponds to a 3 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for March (51.5 percent) is annualized, it corresponds to a 2.6 percent increase in real GDP annually.”
“The March ISM report reflects a number of depressing factors — weather, trade, and commodity deflation — yet reports that manufacturing is still growing at a weak rate,” noted Daniel J. Meckstroth, chief economist for the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation. “Manufacturing production posted moderate growth in the fourth quarter of 2014 (3.6 percent growth in manufacturing industrial production) but industrial production in first quarter of 2015 will have no growth. We believe manufacturing activity will repeat the pattern of last year and pick up briskly in the second and third quarters following this first quarter pause.”
A PMI in excess of 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the March PMI indicates growth for the 70th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 27th consecutive month.
Orders, Production and Inventory
“The New Orders index is off in March,” explains Holcomb. “Nine industries reported growth in new orders while eight reported a decrease, so it’s almost split evenly. That kind of speaks for itself.”
ISM’s New Orders Index registered 51.8 percent in March, a decrease of 0.7 percentage point when compared to the February reading of 52.5 percent, indicating growth in new orders for the 28th 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 53.8 percent in March, which is an increase of 0.1 percentage point when compared to the 53.7 percent reported in February, indicating growth in production for the 31st 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.
ISM’s Backlog of Orders Index registered 49.5 percent in March, which is 2 percentage points lower than the 51.5 percent reported in February, indicating contraction in order backlogs following one month of expansion in order backlogs. Of the 84 percent of respondents who reported their backlog of orders, 18 percent reported greater backlogs, 19 percent reported smaller backlogs, and 63 percent reported no change from February.
The Inventories Index registered 51.5 percent in March, which is 1 percentage point lower than the 52.5 percent registered in February, indicating raw materials inventories are growing for the third 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).
“Inventory levels are in good shape,” says Holcomb. “The mix may be off a little bit, because of the continuing issues with the west coast port and not getting the right parts on the shelf. Nevertheless it’s 51.5 and we’ve seen inventories plus or minus a couple of points around the 50 mark for a long time. It just means that the inventory managers continue to do a great job. It’s both an art and a science and the numbers reflect good, professional efforts on controlling inventories.”
Exports, Imports and Prices
ISM’s New Export Orders Index registered 47.5 percent in March, which is 1 percentage point lower than the 48.5 percent reported in February. March’s reading reflects the third consecutive month of contraction in the level of exports, following 25 consecutive months of growth in new export orders.
ISM’s Imports Index registered 52.5 percent in March, which is 1.5 percentage points lower than the 54 percent reported in February. This month’s reading represents 26 consecutive months of growth in imports.
“A major downside to the ISM report is that the manufacturing trade deficit continues to worsen — imports are growing faster and exports are declining,” Meckstroth added. “Some of the weakness in the index can be attributed to the West Coast port slowdown that delayed imported components incorporated into domestic production. But for the most part, the increase in the value of the dollar, and particularly the strong U.S. growth relative to other advanced economies, is unbalancing trade. Foreign trade will be a major drag on manufacturing activity and the general economy this year and next."
The ISM Prices Index registered 39 percent in March, an increase of 4 percentage points when compared to the February reading of 35 percent, indicating a decrease in raw materials prices for the fifth consecutive month. In March, 10 percent of respondents reported paying higher prices, 32 percent reported paying lower prices, and 58 percent of supply executives reported paying the same prices as in February. 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 50 percent in March, which is a decrease of 1.4 percentage points when compared to the 51.4 percent reported in February. The March reading of 50 percent indicates that there was no change in manufacturing employment relative to February, and follows 21 consecutive months of growth 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.
“Employment in manufacturing is simply tapping the brakes, waiting to see what happens next, to get by this first quarter,” says Holcomb. “I think that we have every reason to believe that we’re well positioned for an uptick in the PMI new orders as we go forward — which is consistent with our earlier forecast in December for the year. But at the moment, we haven’t had the quarter that we all expected, so let’s just pause, and see what happens next.”
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.