ISM: New Orders And Production Leading Gains In Manufacturing

Economic activity in the manufacturing sector expanded in December, and the overall economy grew for the 103rd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Mnet 175611 Manufacturing

Economic activity in the manufacturing sector expanded in December, and the overall economy grew for the 103rd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

U.S. manufacturing expanded in December as the PMI registered 59.7 percent, an increase of 1.5 percentage points from the November reading of 58.2 percent. This indicates growth in manufacturing for the 16th consecutive month, led by strong expansion in new orders and production with hiring growing at a slower rate and supplier deliveries continuing to struggle. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Source image credit: McKinsey - What to do when a specialty-chemical business gets commoditizedSource image credit: McKinsey - What to do when a specialty-chemical business gets commoditized

Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (57.6 percent) corresponds to a 4.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for December (59.7 percent) is annualized, it corresponds to a 5.2 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 December PMI indicates growth for the 103rd consecutive month in the overall economy and the 16th straight month of growth in the manufacturing sector.

Orders, Production and Inventory

ISM’s New Orders Index registered 69.4 percent in December, which is an increase of 5.4 percentage points when compared to the 64 percent reported for November, indicating growth in new orders for the 16th consecutive month. This is the highest reading since January 2004, when the index registered 70.6 percent.

“New Orders expansion continues at a strong pace, with the index at seven straight months of levels above 60 percent. This is its highest expansion level in 14 years,” says Fiore. 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 65.8 percent in December, which is an increase of 1.9 percentage points when compared to the 63.9 percent reported for November, indicating growth in production for the 16th consecutive month. This is the highest reading since May 2010, when the index registered 66.5 percent.

“Production expansion continues at the strongest levels in seven years, but could not keep up with new order input and customer inventory needs, resulting in lower customer inventories and higher backlogs,” says Fiore. An index above 51.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

ISM’s Backlog of Orders Index registered 56 percent in December, an increase of 1 percentage point when compared to the 55 percent reported for November, indicating growth in order backlogs for the 11th consecutive month.

The Inventories Index registered 48.5 percent in December, which is an increase of 1.5 percentage points when compared to the 47 percent reported for November, indicating raw materials inventories contracted in December.

“The inventory contraction reflects the continued difficulty of the supply chain to deliver materials and services meeting production schedules,” says Fiore. 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).

Exports, Imports and Prices

ISM’s New Export Orders Index registered 58.5 percent in December, an increase of 2.5 percentage points when compared to the 56 percent reported for November, indicating growth in new export orders for the 22nd consecutive month.

ISM’s Imports Index registered 57.5 percent in December, an increase of 3.0 percentage points when compared to the 54.5 percent reported for November, indicating that imports grew in December for the 11th consecutive month.

The ISM Prices Index registered 69 percent in December, an increase of 3.5 percentage points from the November level of 65.5 percent, indicating an increase in raw materials prices for the 22nd consecutive month.

In December, 41 percent of respondents reported paying higher prices, 3 percent reported paying lower prices, and 56 percent of supply executives reported paying the same prices as in November.

“The Business Survey Committee noted price increases continue on metals (steel, aluminum, copper and scrap) intermediate chemicals, corrugate and plastic resins. The Committee also reported some price relief on selected electronic components,” says Fiore.

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 57 percent in December, a decrease of 2.7 percentage points when compared to the November reading of 59.7 percent. This indicates growth in employment in December for the 15th consecutive month.

“Employment expansion remains strong, but difficulties across the supply chain continue to constrain production output. ISM®’s recent Semiannual Economic Forecast indicates that 65 percent had difficulty hiring new employees and 44 percent increased starting pay to attract new workers,” says Fiore.

 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 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.

More in Supply Chain