Economic activity in the manufacturing sector expanded in February, and the overall economy grew for the 106th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Manufacturing expanded in February as the PMI registered 60.8 percent, an increase of 1.7 percentage points from the January reading of 59.1 percent. This indicates growth in manufacturing for the 18th consecutive month at strong levels led by continued expansion in new orders, production activity, employment and inventories, with suppliers continuing to struggle delivering to demand. The PMI at 60.8 percent is the highest level of expansion seen since May 2004, when it reached 61.4 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
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 February (60.8 percent) corresponds to a 5.4 percent increase in real gross domestic product (GDP) on an annualized basis.”
A PMI above 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the February PMI indicates growth for the 106th consecutive month in the overall economy and the 18th straight month of growth in the manufacturing sector.
Orders, Production and Inventory
ISM’s New Orders Index registered 64.2 percent in February, which is a decrease of 1.2 percentage points when compared to the 65.4 percent reported for January, indicating growth in new orders for the 26th consecutive month.
“New Orders expansion continues at a strong pace, off slightly from January’s expansion, with 10 straight months at 60 percent or above,” says Fiore. A New Orders Index above 52.4 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 62 percent in February, which is a decrease of 2.5 percentage points when compared to the 64.5 percent reported for January, indicating growth in production for the 18th consecutive month.
“Production expansion continues, in spite of labor, capacity constraints and supplier delivery difficulties. Raw material inventories increased during the period. Production could not keep pace with new order input and customer inventory needs, resulting in higher backlogs,” adds Fiore. An index above 51.5 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 59.8 percent in February, an increase of 3.6 percentage points when compared to the 56.2 percent reported for January, indicating growth in order backlogs for the 13th consecutive month. Backlog expansion continued during the period, with the index achieving its highest level since April 2011, when it registered 59.2 percent. Strong backlog, low customer inventory levels and continued strong new order expansion indicates confidence the production requirements will remain strong through the quarter and into the second quarter.
The Inventories Index registered 56.7 percent in February, which is an increase of 4.4 percentage points when compared to the 52.3 percent reported for January, indicating raw materials inventories grew in February.
“Suppliers made progress in responding to production demand increases, with the Inventories Index achieving the highest level since March 2010, when the index registered 56.8 percent. Inventory growth is a direct result of increased production demand supporting new order inputs,” indicates Fiore. An Inventories Index greater than 43 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 62.8 percent in February, an increase of 3 percentage points when compared to the 59.8 percent reported for January, indicating growth in new export orders for the 24th consecutive month. Exports achieved their highest expansion since April 2011, when the index reached 63.8 percent. All six big industry sectors, accounting for 71 percent of manufacturing GDP, continued to expand export activity during the period.
ISM’s Imports Index registered 60.5 percent in February, an increase of 2.1 percentage points when compared to the 58.4 percent reported for January, indicating that imports grew in February for the 13th consecutive month. Import expansion reached its highest level since February 2007, when the index reached 61.1 percent. “Imports continued to expand at noticeably greater rates during the period in order to support production demand,” says Fiore.
The ISM Prices Index registered 74.2 percent in February, an increase of 1.5 percentage points from the January level of 72.7 percent, indicating an increase in raw materials prices for the 24th consecutive month. In February, 51 percent of respondents reported paying higher prices, 2.7 percent reported paying lower prices, and 46.4 percent of supply executives reported paying the same prices as in January. The Prices Index is at its highest level since May 2011, when it registered 77.9 percent.
“The Business Survey Committee noted price increases continue in metals (all steels, steel scrap, steel components, aluminum and copper), various intermediate chemicals, corrugate, crude oil, plastic resins and parts made from plastics. Shortages continue in the electronics area, labor and freight was noted as being short for the first time,” 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.
ISM’s Employment Index registered 59.7 percent in February, an increase of 5.5 percentage points when compared to the January reading of 54.2 percent. This indicates growth in employment in February for the 17th consecutive month.
“Employment expansion remains strong, with panel member companies increasing head count during February to support growth in production activity,” says Fiore.
An Employment Index above 50.8 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.