ISM Report: Manufacturing At Lowest Level Since April 2003

Despite overall economic growth, manufacturing lost speed after 41 consecutive months of growth, according to November 2006 Manufacturing ISM Report On Business.

Following 41 consecutive months of increases, economic activity in the manufacturing sector showed no growth in November for the first time, despite overall economic growth for the 61st consecutive month, according to the November 2006 Manufacturing ISM (Institute for Supply Management) Report On Business released Friday.

For November, manufacturing activity fell to its lowest level, 49.5 percent, in 42 months, the report's statistics showed, a decrease of 1.7 percentage points when compared to October's reading of 51.2 percent.

The last time the PMI registered below 50 percent was April 2003 (46.5 percent).  A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

But the manufacturing industry should not overreact to these numbers, said Norbert J. Ore, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee.

"We are obviously seeing a manufacturing slowdown in housing and automotive, by design, as a result of interest rate increases by the Fed," Ore noted. "And November manufacturing activity is only slightly less than October (at the end of 41 months of growth)."

Ore added that manufacturing "is not in a major free fall" and this mid-cycle lull is normal for the business cycle.  "Inventories are on the high side and we should see an adjustment by the end of the fourth quarter and the beginning of the first quarter," said Ore. "Manufacturing might be slowing a bit, but it will gain momentum again."     

According to Ore there are three things to look at that are affecting manufacturing at this time: government spending is staying strong on a state and local level; the business investment slowdown has had a big impact on manufacturing; and consumer spending is holding up well.

"There is 4.4% unemployment, meaning a lot of people are working," commented Ore. "Exports look good and the U.S. is in a favorable position with the dollar being so weak."

“The November ISM index fell below the 50 percent mark, the dividing line between growth and decline, in November – the lowest level in 42 months,” said Daniel J. Meckstroth, Chief Economist for the Manufacturers Alliance/MAPI. “The signal of declining production should not come as a surprise given that the Federal Reserve’s industrial production index for manufacturing fell in both September and October. Two major manufacturing markets are declining (motor vehicles and housing) and many other industries are trying to adjust inventories to adjust for a period of much slower growth ahead in 2007.”

While New Orders and Production both ceased their growth numbers at the 42 month mark for November, New Export Orders increased due to the weaker dollar.  

The report lists (in order) these eight industries as showing growth in November: Apparel, Leather & Allied Products; Plastics & Rubber Products; Primary Metals; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Computer & Electronic Products; Printing & Related Support Activities; and Chemical Products.

ISM's New Orders Index registered 48.7 percent in November; this is 3.4 percentage points lower than the 52.1 percent reported in October.

The Production Index was 48.5 percent in November, 3.4 percentage points lower than the 51.9 percent reported in October.

ISM's Employment Index registered 49.2 percent in November, a decrease of 1.6 percentage points when compared to October's reading of 50.8 percent.

For the 41st consecutive month in November, the delivery performance of suppliers to manufacturing organizations was slower. ISM's Supplier Deliveries Index for November registered 52.8 percent, an increase of 2.6 percentage points when compared to October's reading of 50.2 percent.

Manufacturers' inventories contracted at a slower rate in November as ISM's Inventories Index registered 49.7 percent, a 0.3 percentage point increase when compared to October's reading of 49.4 percent.

The ISM Customers' Inventories Index registered 50.5 percent in November, which is 1.5 percentage points lower than the 52 percent reported in October.

These numbers indicate that the report's respondents believe that their customers currently have enough inventory on hand. This is the second month of growth following 64 consecutive months in which the index registered below 50 percent.

In November, the ISM Prices Index registered 53.5 percent, indicating manufacturers are paying higher prices on average when compared to October.

ISM's Backlog of Orders Index registered 46.5 percent, indicating manufacturers' backlogs in November are contracting for the third consecutive month. The index is 2 percentage points higher than the 44.5 percent reported in October.

The New Export Orders Index registered 56.9 percent in November, a decrease of 0.9 percentage point when compared to October's index of 57.8 percent. This is the 48th consecutive month of growth in export orders.

Imports of materials by manufacturers grew during November as the Imports Index showed56.5 percent. The index is 0.5 percentage point lower when compared to October.

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