Economic activity in the manufacturing sector expanded in December for the 19th consecutive month, and the overall economy grew for the 67th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Manufacturing expanded in December as the PMI registered 55.5 percent, a decrease of 3.2 percentage points when compared to November’s reading of 58.7 percent, indicating growth in manufacturing for the 19th consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
“The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (55.8 percent) corresponds to a 4.2 percent increase in real gross domestic product (GDP) on an annualized basis,” says Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee. “In addition, if the PMI for December (55.5 percent) is annualized, it corresponds to a 4.1 percent increase in real GDP annually.”
A PMI in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December PMI indicates growth for the 67th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 19th consecutive month.
“The January report shows that an improving U.S. economy is propelling continued growth in U.S. manufacturing,” adds Cliff Waldman, director of economic studies for the MAPI Foundation. “While the PMI slowed from 58.7 percent in November to 55.5 percent in December, it remains well above the 50 percent threshold that signals output gains. Nonetheless, there was a troubling decline in both the new orders and production indices from albeit unsustainably high levels in November. Both remain in growth territory.”
Looking at a three year trend, the average PMI for 2014 was 55.8. That number is 1.9 percentage points above the average for 2013, while 2013 was 2.1 percentage points above 2012. So looking at the longer term trend, the numbers on the average PMI go up about 2 percentage points per year for the last couple of years.
Orders, Production, and Inventory
ISM’s New Orders Index registered 57.3 percent in December, a decrease of 8.7 percentage points when compared to the 66 percent reported in November, indicating growth in new orders for the 19th 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 58.8 percent in December, which is a decrease of 5.6 percentage points when compared to the 64.4 percent reported in November, indicating growth in production for the 10th 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.
“We have a fewer number of industries reporting growth in new orders for December,” notes Holcomb. “I suspect that some of this is related to the oil industry showing up here in various ways. For example, there are comments from the electronics and computer products industry stating that the oil industry itself is ordering less of their products. The same is true with electrical equipment and machinery. It’s hard to tease out the exact implications, but in any case, it’s a little bit new and something we’ll have to watch.”
ISM’s Backlog of Orders Index registered 52.5 percent in December, which is 2.5 percentage points lower than the 55 percent reported in November, indicating growth in order backlogs for the third consecutive month. Of the 87 percent of respondents who reported their backlog of orders, 25 percent reported greater backlogs, 20 percent reported smaller backlogs, and 55 percent reported no change from November.
The Inventories Index registered 45.5 percent in December, which is 6 percentage points lower than the 51.5 percent registered in November, indicating raw materials inventories are contracting following four consecutive months of growth in inventories. An Inventories Index greater than 42.8 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis’ (BEA) figures on overall manufacturing inventories (in chained 2000 dollars).
“A couple of things are playing into this,” explains Holcomb. “First, decreasing oil prices have caused buyers to slow down their buying activity in anticipation of lower prices of raw materials in a few weeks from now. But they can’t holdout very long because they need inventories to keep production going. The second factor is the West Coast docks slowdown is showing up in our comments, because it is impacting the delivery of imported goods and along with that raw materials from abroad.”
ISM’s Employment Index registered 56.8 percent in December, which is an increase of 1.9 percentage points when compared to the 54.9 percent reported in November. This is the 18th consecutive month 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.
“I think that when you increase in December, it’s related to the forward-looking view that our manufacturers have of their order books,” says Holcomb. “To add employment at the end of the year is not all that normal. This is really a good sign and consistent with our forecast which calls for a very solid growth year for 2015.”
Exports, Imports and Prices
ISM’s New Export Orders Index registered 52 percent in December, which is 3 percentage points lower than the 55 percent reported in November. December’s reading reflects growth in the level of exports for the 25th consecutive month.
“Although exports are down 3 percentage points, they are still growing for 25 consecutive months,” notes Holcomb. “At this point, it’s a normal variation. I’m just glad to see exports above 50 when you look at some of the headlines about Europe and China. But the number does show confidence in U.S. manufactured goods.”
ISM’s Imports Index registered 55 percent in December, which is 1 percentage point lower than the 56 percent reported in November. This month’s reading represents 23 consecutive months of growth in imports.
The ISM Prices Index registered 38.5 percent in December, which is a decrease of 6 percentage points compared to the November reading of 44.5 percent. In December, 12 percent of respondents reported paying higher prices, 35 percent reported paying lower prices, and 53 percent of supply executives reported paying the same prices as in November. This is the second consecutive month that raw materials prices have registered a decrease, with the Prices Index decreasing a total of 15 percentage points over these two months. A Prices Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.
“Prices have gone down significantly for two months in a row, but those are healthy decreases, largely, if not exclusively related to oil reduction which ultimately impacts a lot of other things,” explains Holcomb. “The positive here is that raw materials prices are lower, which helps the margins of manufacturing companies. The lower oil prices also result in less energy to run their plants, so there’s a double benefit. On the flipside, the oil specific industry group will ratchet down their spending and do some belt tightening until they sort things out.”
While activity slowed at the turn of the year, it seems clear that the U.S. factory sector will likely remain on a moderate growth track. "The port slowdown could influence factory sector performance over the next few months or more, however. And, more significantly, the weak economic outlook outside of the U.S. is troubling for the export strength that U.S. goods producers have come to increasingly rely on. Short-term performance issues in the Eurozone, China, and Latin America, and a brewing crisis in Russia, will affect all goods production markets to some extent both in terms of demand and pricing," concludes Waldman.
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.