ISM: Manufacturing Set For A Strong Q4

Economic activity in the manufacturing sector expanded in September for the 16th consecutive month, and the overall economy grew for the 64th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Economic activity in the manufacturing sector expanded in September for the 16th consecutive month, and the overall economy grew for the 64th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Manufacturing expanded in September as the PMI registered 56.6 percent, a decrease of 2.4 percentage points when compared to August’s reading of 59 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

β€œEven with new orders down 6.7 percent, 60 is still a great number and August’s 66.7 was the highest number in years so you can’t expect to maintain at that level,” says Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee. β€œIt’s a continuation of what we’ve been seeing. Now we’ve got 3 quarters in the drawer and from a quarterly perspective, Q3 has been the strongest quarter yet with an average PMI of 57.6. Whereas Q2 is at 55.2 and Q1 was 52.7. So very much moving in the right direction and setting us up for a good fourth quarter.”

A PMI in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the September PMI indicates growth for the 64th consecutive month in the overall economy and indicates expansion in the manufacturing sector for the 16th consecutive month

Orders, Production and Inventory

ISM’s New Orders Index registered 60 percent in September, a decrease of 6.7 percentage points when compared to the 66.7 percent reported in August, indicating growth in new orders for the 16th 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 64.6 percent in September, which is a slight increase of 0.1 percentage point when compared to the 64.5 percent reported in August, indicating growth in production for the seventh consecutive month. This is the highest reading since May 2010 when the Production Index also registered 64.6 percent. An index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

β€œNew Orders Index at 60 is strong. It’s supported by 12 of our 18 industries growing new orders and only 2 reporting a decrease,” adds Holcomb. β€œThe goal of manufacturing is to keep production level with respect to its resources, level of employment and assets. Manufacturers are not only working on new orders, but are also working off some of the backlog of orders where there was a 5.5 percentage point drop.” 

ISM’s Backlog of Orders Index registered 47 percent in September, which is 5.5 percentage points lower than the 52.5 percent reported in August, indicating contraction in order backlogs following one month of growth. Of the 85 percent of respondents who reported their backlog of orders, 18 percent reported greater backlogs, 24 percent reported smaller backlogs, and 58 percent reported no change from August.

The Inventories Index registered 51.5 percent in September, which is 0.5 percentage point lower than the 52 percent registered in August, which indicates raw materials inventories are growing for the second consecutive month. 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).

β€œIn this environment of good, solid orders in sort of a robust business environment, manufacturing tries to keep inventories just above 50 so that they don’t run out of raw materials to meet those orders,” explains Holcomb.

Exports, Imports and Prices

ISM’s New Export Orders Index registered 53.5 percent in September, which is 1.5 percentage points lower than the 55 percent reported in August. September’s reading reflects growth in the level of exports for the 22nd consecutive month.

ISM’s Imports Index registered 53 percent in September, which is 3 percentage points lower than the 56 percent reported in August. This month’s reading represents 20 consecutive months of growth in imports.

β€œThe import and export numbers are down a bit, but I think they’re normal variations,” says Holcomb. β€œWe’ve been on a good export run indicating that the rest of the world likes our finished products. If you look at China’s manufacturing, it’s just kind of going along at a low level while Europe manufacturing is down. Meanwhile the U.S. remains strong.”

The ISM Prices Index registered 59.5 percent in September, which is an increase of 1.5 percentage points compared to the August reading of 58 percent. In September, 28 percent of respondents reported paying higher prices, 9 percent reported paying lower prices, and 63 percent of supply executives reported paying the same prices as in August. 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.

β€œPrices are pretty indifferent,” explains Holcomb. β€œIt is up a little bit in terms of the direction, but if you couple that with our commodities up in price list, that list is relatively short.”

Employment

ISM’s Employment Index registered 54.6 percent in September, which is a decrease of 3.5 percentage points when compared to 58.1 percent reported in August. This is the 15th 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.

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.


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