ISM: A Strong Manufacturing Climate

Economic activity in the manufacturing sector expanded in April, and the overall economy grew for the 95th 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 April, and the overall economy grew for the 95th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Manufacturing expanded in April as the PMI registered 54.8 percent, a decrease of 2.4 percentage points from the March reading of 57.2 percent, indicating growth in manufacturing for the eighth consecutive month. 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 April (56.4 percent) corresponds to a 4.1 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for April (54.8 percent) is annualized, it corresponds to a 3.6 percent increase in real GDP annually.”

A PMI above 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the April PMI indicates growth for the 95th consecutive month in the overall economy and the eighth straight month of growth in the manufacturing sector.

“For the PMI, each month of 2017 is higher than any month of 2016,” states Holcomb. “So we are off to a very good start in the first four months of this year.”

Orders, Production and Inventory

ISM’s New Orders Index registered 57.5 percent in April, which is a decrease of 7 percentage points when compared to the 64.5 percent reported for March, indicating growth in new orders for the eighth 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).

“New Orders dropping seven points in April isn't necessarily a concern,” explains Holcomb. “With New Orders at 64.5 in March, that number is high and we would not expect to sustain that for a long period of time. This is a great number and we have 16 of our 18 industries reporting growth in new orders. No industry reported contraction.”

ISM’s Production Index registered 58.6 percent in April, which is an increase of 1 percentage point when compared to the 57.6 percent reported for March, indicating growth in production for the eighth 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 51 percent in April, which is an increase of 2 percentage points when compared to the 49 percent reported for March, indicating raw materials inventories are growing in April. 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).

“Inventories have been up and down around that 50 mark—and was contracting last month at 49 points and is now growing at 51,” says Holcomb. “What it all says is that our great inventory control managers are managing inventories very tight around that 50 mark, making sure they have enough inventory to satisfy production and new orders, but not too much to tie up money in inventory.”

ISM’s Backlog of Orders Index registered 57 percent in April, a decrease of 0.5 percentage point from the 57.5 percent reported for March, indicating growth in order backlogs for the third consecutive month. Of the 88 percent of respondents who reported their backlog of orders, 29 percent reported greater backlogs, 15 percent reported smaller backlogs, and 56 percent reported no change from March.

Exports, Imports and Prices

ISM’s New Export Orders Index registered 59.5 percent in April, an increase of 0.5 percentage point when compared to the 59 percent reported for March, indicating growth in new export orders for the 14th consecutive month. This is the highest reading since November 2013, when the index also registered 59.5 percent.

“Together, the Import and Export numbers show us that commerce is flowing quite nicely back and forth across the oceans,” explains Holcomb. “Our international customers continue to buy American-made finished goods which is partially due to the tenuous price of the dollar, making our goods easier to afford.”

ISM’s Imports Index registered 55.5 percent in April, an increase of 2 percentage points when compared to the 53.5 percent reported for March, indicating that imports are growing in April for the third consecutive month.

The ISM Prices Index registered 68.5 percent in April, a decrease of 2 percentage points when compared to the March reading of 70.5 percent, indicating an increase in raw materials prices for the 14th consecutive month. In April, 44 percent of respondents reported paying higher prices, 7 percent reported paying lower prices, and 49 percent of supply executives reported paying the same prices as in March. 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.

Employment

ISM’s Employment Index registered 52 percent in April, a decrease of 6.9 percentage points when compared to the March reading of 58.9 percent, indicating growth in employment in April for the seventh 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.

“It's a strong manufacturing climate with good, solid comments from the panel respondents. Things are quite good, if not robust,” concludes Holcomb.

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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