Economic activity in the manufacturing sector expanded in January, and the overall economy grew for the 92nd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Manufacturing expanded in January as the PMI registered 56 percent, an increase of 1.5 percentage points from the seasonally adjusted December reading of 54.5 percent, indicating growth in manufacturing for the fifth 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 Institute for Supply Management Manufacturing Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the PMI for January (56 percent) corresponds to a 4 percent increase in real gross domestic product (GDP) on an annualized basis.”
A PMI above 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the January PMI indicates growth for the 92nd consecutive month in the overall economy, and indicates growth in the manufacturing sector for the fifth consecutive month.
“The PMI set a new record and it's the highest number since December 2014,” adds Holcomb. “That is also true of New Orders and Production with new highs since November 2014. Twelve industries are reporting growth in New Orders and 10 industries report growth in Production. So manufacturing is certainly growing on the momentum of the last four months of 2016.”
Orders, Production and Inventory
ISM’s New Orders Index registered 60.4 percent in January, which is an increase of 0.1 percentage point when compared to the seasonally adjusted 60.3 percent reported for December, indicating growth in new orders for the fifth consecutive month. A New Orders Index above 52.3 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 61.4 percent in January, which is an increase of 2 percentage points when compared to the seasonally adjusted 59.4 percent reported for December, indicating growth in production for the fifth consecutive month. An index above 51.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
The Inventories Index registered 48.5 percent in January, which is an increase of 1.5 percentage points when compared to the 47 percent reported for December, indicating raw materials inventories are contracting in January for the 19th 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 have been operating in a pretty tight range below 50 for a number of months,” explains Holcomb. “It continues to mean that inventories are being controlled downward below 50 on purpose to keep investments down and keep flexible, nimble and lean.”
ISM’s Backlog of Orders Index registered 49.5 percent in January, an increase of 0.5 percentage point from the 49 percent reported for December, indicating contraction in order backlogs for the seventh consecutive month. Of the 89 percent of respondents who reported their backlog of orders, 21 percent reported greater backlogs, 22 percent reported smaller backlogs, and 57 percent reported no change from December.
Exports, Imports and Prices
ISM’s New Export Orders Index registered 54.5 percent in January, a decrease of 1.5 percentage points when compared to the 56 percent reported for December, indicating growth in new export orders for the 11th consecutive month.
“Exports is particularly interesting as we hear about the high price of the dollar — which would mean that our exports are more expensive to our overseas customers,” says Holcomb. “Nevertheless, they continued to buy, meaning they like our products in terms of quality, selection, availability and innovation. I expect that to continue and be in good shape, despite the price of the dollar.”
“On the Import side, Imports with a high dollar would be more affordable, but we’ll only take imports of raw materials and subassemblies—which translates into inventories—that we need to need to produce current orders,” explains Holcomb.
ISM’s Imports Index registered 50 percent in January, a decrease of 0.5 percentage point when compared to the 50.5 percent reported for December, indicating that imports are unchanged from December.
The ISM Prices Index registered 69 percent in January, an increase of 3.5 percentage points when compared to the December reading of 65.5 percent, indicating an increase in raw materials prices for the 11th consecutive month. In January, 44 percent of respondents reported paying higher prices, 6 percent reported paying lower prices, and 50 percent of supply executives reported paying the same prices as in December. A Prices Index above 52.4 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.
“Prices are certainly something for us to watch,” Holcomb advises. “We were growing for 11 consecutive months, but I don’t think we’ve caught up with prices prior to that because we had a downturn in prices and actually deflationary pricing the whole of 2016. This is pretty much following what happens to oil and will continue to do so. If you notice the commodities up in price, a lot of those are of the metals complexes — a lot of those are related to the price of oil.”
Employment
ISM’s Employment Index registered 56.1 percent in January, an increase of 3.3 percentage points when compared to the seasonally adjusted December reading of 52.8 percent, indicating growth in employment in January for the fourth consecutive month. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.
The Employment number is the highest since August 2014 and at a time when we’re at very high levels of employment already making this quite interesting, if not remarkable,” says Holcomb. “To reach 56.1, it shows that there’s a need for additional employees. There have been announcements of employee gains this week and manufacturing is certainly playing a part in that.”
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 for Supply Management, visit www.ism.ws.