Economic activity in the manufacturing sector expanded in January for the 20th consecutive month, and the overall economy grew for the 68th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Manufacturing expanded in January as the PMI registered 53.5 percent, a decrease of 1.6 percentage points when compared to December’s reading of 55.1 percent, indicating growth in manufacturing for the 20th 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 PMI for January (53.5 percent) corresponds to a 3.3 percent increase in real gross domestic product (GDP) on an annualized basis.”
Daniel J. Meckstroth, chief economist for the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation notes, “This marked the third month of a negative change since October 2014. The dividing line between growth and decline is 50 percent, so while January manufacturing production rose the index level suggests production is growing at a slower rate. Over the last 25 years, the index was below 53.5 percent about 60 percent of the time. All of the components of the index that deal with orders and production were less favorable. The backlog index fell to 45, indicating that orders were not sufficient to keep backlogs up. The only good news in the report is that the employment index continues to signal a rising level of manufacturing employment.”
A PMI in excess of 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the January PMI indicates growth for the 68th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 20th consecutive month.
“Comments from the panel indicate that most industries, but not all, are experiencing strong demand as 2015 kicks off. The West Coast dock slowdown continues to be a problem, negatively impacting both exports and imports as well as inventories,” adds Holcomb.
Orders, Production and Inventory
ISM’s New Orders Index registered 52.9 percent in January, a decrease of 4.9 percentage points when compared to the December seasonally adjusted reading of 57.8 percent, indicating growth in new orders for the 20th 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 56.5 percent in January, which is a decrease of 1.2 percentage points when compared to the seasonally adjusted 57.7 percent reported in December, indicating growth in production for the 11th 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 46 percent in January, which is 6.5 percentage points lower than the 52.5 percent reported in December, indicating contraction in order backlogs following three months of growth in order backlogs. Of the 87 percent of respondents who reported their backlog of orders, 18 percent reported greater backlogs, 26 percent reported smaller backlogs, and 56 percent reported no change from December.
The Inventories Index registered 51 percent in January, which is 5.5 percentage points higher than the 45.5 percent registered in December, indicating raw materials inventories are growing following one month of inventories contracting. 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 49.5 percent in January, which is 2.5 percentage points lower than the 52 percent reported in December. January’s reading reflects a month of contraction in the level of exports, following 25 consecutive months of growth in new export orders.
ISM’s Imports Index registered 55.5 percent in January, which is 0.5 percentage point higher than the 55 percent reported in December. This month’s reading represents 24 consecutive months of growth in imports.
“A major downside to the ISM report is that the manufacturing trade deficit continues to get worse,” Meckstroth cautions. “Imports are growing faster and exports are falling. The export index dipped below 50 to 49.5 but the imports index rose to 55.5 from 55 in December. Foreign trade will be a drag on manufacturing activity this year.”
The ISM Prices Index registered 35 percent in January, which is a decrease of 3.5 percentage points compared to the December reading of 38.5 percent. In January, 11 percent of respondents reported paying higher prices, 41 percent reported paying lower prices, and 48 percent of supply executives reported paying the same prices as in December. This is the third consecutive month that raw materials prices have registered a decrease, with the Prices Index decreasing a total of 18.5 percentage points over these three months. 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.
“Falling oil prices and other commodity prices are evident in the report,” Meckstroth added. “The price index indicated declining prices for the last three months. Deflation in commodity prices is good for consumers (especially oil prices) but it does influence the pace of investment spending.”
ISM’s Employment Index registered 54.1 percent in January, which is a decrease of 1.9 percentage points when compared to the seasonally adjusted 56 percent reported in December. This is the 19th 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 data on manufacturing employment.
“The January ISM report is neither good nor bad but lukewarm,” Meckstroth concludes. “Manufacturing production was exceptionally strong in the fourth quarter (5.2 percent growth in manufacturing industrial production), with the overall economy decelerating from a growth of 5 percent in the third quarter to 2.6 percent in the fourth quarter. Manufacturing activity is now shifting to a slower, more sustainable rate of growth.”
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.