ISM: Manufacturing Hits A Soft Spot

Economic activity in the manufacturing sector expanded in September for the 33rd consecutive month, and the overall economy grew for the 76th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business.

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Economic activity in the manufacturing sector expanded in September for the 33rd consecutive month, and the overall economy grew for the 76th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

“In a clear sign of further weakening in the U.S. manufacturing sector, the Institute for Supply Management (ISM) index fell from 51.1 percent in August to 50.2 percent in September, its third consecutive decline,” noted Cliff Waldman, director of economic studies for the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation. “This is the lowest level for this widely followed index since May 2013; it comes quite close to the 50 percent mark separating growth from contraction.”

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 September (52.2 percent) corresponds to a 2.9 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for September (50.2 percent) is annualized, it corresponds to a 2.2 percent increase in real GDP annually.”

A PMI in excess of 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the September PMI indicates growth for the 76th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 33rd consecutive month.

Orders, Production and Inventory

ISM’s New Orders Index registered 50.1 percent in September, a decrease of 1.6 percentage points when compared to the August reading of 51.7 percent, indicating growth in new orders for the 34th consecutive month, but at a slower rate. 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).

“Looking at new orders, we have seven industries reporting growth and nine industries reporting a decrease,” says Holcomb. “That’s not the right balance obviously.”

ISM’s Production Index registered 51.8 percent in September, which is a decrease of 1.8 percentage points when compared to the 53.6 percent reported in August, indicating growth in production for the 37th 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.

“The new orders and production components fell by a significant 1.6 and 1.8 percentage points, respectively, although both are still advancing,” Waldman explains. “Nonetheless, a sharp fall of 5 percentage points in the backlog of orders, to 41.5 percent, a number that is deep in contraction territory, suggests that there is little pressure on the production schedule and thus manufacturing output gains are likely to be weak over the near-term."

ISM’s Backlog of Orders Index registered 41.5 percent in September, a decrease of 5 percentage points as compared to the August reading of 46.5 percent. Of the 88 percent of respondents who measure their backlog of orders, 13 percent reported greater backlogs, 30 percent reported smaller backlogs, and 57 percent reported no change from August.

The Inventories Index registered 48.5 percent in September, which is the same reading as in August, indicating raw materials inventories are contracting in September 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).

Exports, Imports and Prices

ISM’s New Export Orders Index registered 46.5 percent in September, which was the same reading as in August. This is the fourth consecutive month that the survey panel indicated their new export orders decreased.

ISM’s Imports Index registered 50.5 percent in September, which is 1 percentage point lower than the 51.5 percent reported in August. This month’s reading represents 32 consecutive months of growth in imports.

“With the global economy experiencing its most difficult year since the Great Recession, risks for U.S. factory performance are all to the downside,” Waldman cautions. “Major economies such as Brazil, Russia, Japan and Canada are in recession. The dramatic slowing in Chinese economic growth, through its impact on commodities exporters and Asian industrial performance, is exacerbating a bleak world picture. And with a high dollar, U.S. goods producers are dealing with difficult price competiveness issues on top of weak demand."

The ISM Prices Index registered 38 percent in September, which is 1 percentage point lower than in August, indicating a decrease in raw materials prices for the 11th consecutive month. In September, 6 percent of respondents reported paying higher prices, 30 percent reported paying lower prices, and 64 percent of supply executives reported paying the same prices as in August. 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.

“Prices dropping for eleven months in a row is highly unusual and it all correlates to the price of oil, and relatedly to the price of plastics which contain petroleum, plus the metals complex which uses petroleum to produce metals,” says Holcomb. “For the oil and gas industry, it’s not good news. They have to pull back, lay off employees and projects are being cancelled. But for most of the rest of our industries, it means lower raw material prices and lower costs to run their factories. In that sense, it’s a benefit to manufacturing."

“We’re at a soft point where people are uncertain which way things are going. This month’s PMI is really a reflection of that uncertainty, but it looks like its ticking up if you look at consumer confidence. Manufacturing has to catch up with that through new orders,” Holcomb concludes.

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 of Supply Management, visit www.ism.ws.

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