ISM: Very Solid Ending To 2016 For Manufacturing

Economic activity in the manufacturing sector expanded in December, and the overall economy grew for the 91st consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

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Economic activity in the manufacturing sector expanded in December, and the overall economy grew for the 91st consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Manufacturing expanded in December as the PMI registered 54.7 percent, an increase of 1.5 percentage points from the November reading of 53.2 percent, indicating growth in manufacturing for the fourth consecutive month and a new high reading for the year. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

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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 average PMI for January through December (51.5 percent) corresponds to a 2.6 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for December (54.7 percent) is annualized, it corresponds to a 3.6 percent increase in real GDP annually.”

A PMI above 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the December PMI indicates growth for the 91st consecutive month in the overall economy, and indicates growth in the manufacturing sector for the fourth consecutive month.

“December's PMI sets a high for the year 2016 and, in fact, it's a two year high since December 2014. we're in a very good place and it's been building the last few months to get there. It's lead by New Orders, Production and Employment which also registered a new high for the year in all three of those categories,” says Holcomb.

Orders, Production and Inventory

ISM’s New Orders Index registered 60.2 percent in December, which is an increase of 7.2 percentage points when compared to the 53 percent reported for November, indicating growth in new orders for the fourth consecutive month and a new high reading for the year. A New Orders Index above 52.2 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).

“We always talk about New Orders driving the bus and this month's number reflects consumer confidence which, I think, is at a 13 year high in the month of December,” explains Holcomb. “It starts and ends with the consumer purchasing manufactured goods and it translates to at 7.2 percent increase in New Orders.”

ISM’s Production Index registered 60.3 percent in December, which is an increase of 4.3 percentage points when compared to the 56 percent reported for November, indicating growth in production for the fourth consecutive month and a new high reading for the year. An index above 51.3 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

The Inventories Index registered 47 percent in December, which is a decrease of 2 percentage points when compared to the 49 percent reported for November, indicating raw materials inventories are contracting in December for the 18th 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).

“Inventories have been in that range just below 50 for the last 18 months and reflects a lean inventory system or policy, but also companies like to reduce their inventory levels at the end of the year to close the books with less month tied up in inventories,” says Holcomb. “This number at 47 is a reflection of all of that.”

ISM’s Backlog of Orders Index registered 49 percent in December, the same reading as reported for November, indicating contraction in order backlogs for the sixth consecutive month. Of the 88 percent of respondents who reported their backlog of orders, 21 percent reported greater backlogs, 23 percent reported smaller backlogs, and 56 percent reported no change from November.

Exports, Imports and Prices

ISM’s New Export Orders Index registered 56 percent in December, an increase of 4 percentage points when compared to the 52 percent reported for November, indicating growth in new export orders for the 10th consecutive month.

“New Export Orders are finished goods and it’s very interesting that its going up four full percentage points, particularly when you know that the price of the dollar has also been going up against most currencies and that would tend to drag down New Export Orders, but it’s not the case here,” adds Holcomb. “What it is suggesting is that our international customers are willing to pay even a little bit more to get quality products from the United States.”

ISM’s Imports Index registered 50.5 percent in December, the same reading as reported for November. This month’s reading indicates growth in imports for the third consecutive month.

The ISM Prices Index registered 65.5 percent in December, an increase of 11 percentage points when compared to the November reading of 54.5 percent, indicating an increase in raw materials prices for the 10th consecutive month. In December, 38 percent of respondents reported paying higher prices, 7 percent reported paying lower prices, and 55 percent of supply executives reported paying the same prices as in November. 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.

“We’re not sure if the price spike is good, bad or indifferent for manufacturing, it certainly is a big jump in the month of December and something we’ll be keeping an eye on,” explains Holcomb. “Generally we don’t see prices increases to this extend in the latter part of the year, but more so in the first quarter of the year when companies negotiation new contracts for raw materials. We also see where prices have been gradually increasing for 10 months following a year and a half where prices were falling. While prices had been falling the previous year, we forecast that in 2017 prices will increase a modest 1.3 percent overall.”

Employment

ISM’s Employment Index registered 53.1 percent in December, an increase of 0.8 percentage point when compared to the November reading of 52.3 percent, indicating growth in employment in December for the third consecutive month and a new high reading for the year. 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.

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.

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