Manufacturing Enters 2007 In A Decline

January ISM statistics show economic activity for manufacturing shrank, while overall economy grew for 63rd consecutive month.

Following a one-month expansion, economic activity for the manufacturing sector shrank in January, while the overall economy saw growth for the 63rd consecutive month, according to the Manufacturing ISM (Institute for Supply Management) Report On Business released Thursday.

The manufacturing economy did not grow in January as the PMI registered 49.3 percent, a decrease of 2.1 percentage points when compared to December's seasonally adjusted reading of 51.4 percent.

A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 41.9 percent, over a period of time, usually indicates an expansion of the overall economy. The January PMI indicates that while the overall economy is growing, the manufacturing sector is contracting.

"This month's ISM report can be seen as positive news in a negative package," said Norbert J. Ore, C.P.M., chair of the Institute for Supply Management's Manufacturing Business Survey Committee. "You can't just look at statistics for one month. Although January showed no manufacturing growth, the average index for the past four months was at 50.5 percent, indicating no relative change."

According to Ore, manufacturing is currently going through a period of adjustment and manufacturing activity is at a fairly high level. He predicts that manufacturing will be at a sustained level through the first half of 2007, and will return to growth during the second half of the year.

One area of manufacturing that should be looked at is the Inventories Index, which shows the largest point decrease since August 1984. Ore attributes this decline to manufacturers who are finally beginning to recognize the potential inventory problem. As the backlog of orders declines, manufacturers are adjusting and thinning out inventories.

“The weak ISM report for January indicates that the inventory adjustment in the manufacturing sector has yet to fully run its course and that the production slump which began in the latter part of the third quarter of 2006 will continue into the new year,” said Cliff Waldman, Economist for the Manufacturers Alliance/MAPI. “The largest contributor to the January weakness was the sharp acceleration of the inventory drawdown in manufacturing, most likely in autos and in industries that are directly impacted by auto and housing weakness. 

“New orders were positive in January although the continued contraction in the backlog of orders remains a concern for the production outlook,” he added. “Solid export demand and a likely rebound in capital spending from the fourth quarter contraction should allow for continued manufacturing growth during 2007 but at a considerably slower pace than that of 2006.”

ISM's New Orders Index registered 50.3 percent in January. The index is 1.6 percentage points lower than the seasonally adjusted 51.9 percent reported in December.

The Production Index registered 49.6 percent in January, 2.8 percentage points lower than the seasonally adjusted 52.4 percent reported in December. Manufacturers' production is contracting after a one-month expansion in December.

ISM's Employment Index shows that this is the third consecutive month that manufacturing employment has contracted. The Employment Index registered 49.5 percent in January, an increase of 0.1 percentage point when compared to December's seasonally adjusted reading of 49.4 percent.

Manufacturers' inventories shrank at a much faster rate in January as ISM's Inventories Index registered 39.9 percent, an 8.6 percentage point decrease when compared to December's reading of 48.5 percent (seasonally adjusted). This is the largest point decrease in the Inventories Index since August 1984 when the index dropped from 57.8 percent to 49.1 percent, a decrease of 8.7 percentage points.

For January, manufacturers paid higher prices on average compared to December, as indicated by the ISM Prices Index which registered at 53 percent.

ISM's Backlog of Orders Index registered 43.5 percent, indicating manufacturers' backlogs in January are contracting for the fifth consecutive month.

Export orders grew for the 50th consecutive month in January, shown in ISM's New Export Orders Index which registered 52.5 percent, a decrease of 1.8 percentage points when compared to December's index of 54.3 percent.

Import orders also grew, for the 61st consecutive month, with an Imports Index register of 54.5 percent, which is 1 percentage point lower when compared to December.


More in Supply Chain