ISM: Manufacturing Continues Strong Growth Trajectory

Economic activity in the manufacturing sector expanded in October for the 17th consecutive month, and the overall economy grew for the 65th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Economic activity in the manufacturing sector expanded in October for the 17th consecutive month, and the overall economy grew for the 65th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

Manufacturing expanded in October as the PMI registered 59 percent, an increase of 2.4 percentage points when compared to September’s reading of 56.6 percent. This is the same reading as reported in August 2014, which is the highest reading for the index since March of 2011 when it registered 59.1 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

“The past relationship between the PMI and the overall economy indicates that the average PMI for January through October (55.6 percent) corresponds to a 4.1 percent increase in real gross domestic product (GDP) on an annualized basis,” says Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee. “In addition, if the PMI for October (59 percent) is annualized, it corresponds to a 5.2 percent increase in real GDP annually.”

A PMI in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the October PMI indicates growth for the 65th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 17th consecutive month.

“With holidays approaching, manufacturers are largely bullish about their prospects, particularly as they see strong demand and lower input prices with some softening in commodities,” adds Russ Rasmus, managing director of Accenture Strategy, Manufacturing.

Orders, Production and Inventory

ISM’s New Orders Index registered 65.8 percent in October, an increase of 5.8 percentage points when compared to the 60 percent reported in September, indicating growth in new orders for the 17th consecutive month. A New Orders Index above 52.1 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 64.8 percent in October, which is an increase of 0.2 percentage point when compared to the 64.6 percent reported in September, indicating growth in production for the eighth consecutive month. This is the highest reading since May 2004 when the Production Index registered 65.3 percent. An index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

“New Orders is very strong and was actually at a 10 year high in August,” add Holcomb.  “We’re not quite back to that, but still at a very strong number. We have 14 of our 18 industries reporting growth in new orders, and three reporting at even from last month. This is very broad-based growth, which just indicates that customers are lining up for these products.”

ISM’s Backlog of Orders Index registered 53 percent in October, which is 6 percentage points higher than the 47 percent reported in September, indicating growth in order backlogs following one month of contraction. Of the 88 percent of respondents who reported their backlog of orders, 24 percent reported greater backlogs, 18 percent reported smaller backlogs, and 58 percent reported no change from September.

The Inventories Index registered 52.5 percent in October, which is 1 percentage point higher than the 51.5 percent registered in September, indicating raw materials inventories are growing for the third 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).

"Even in the difficult situation of strong production — which chews up inventory — and suppliers’ deliveries slowing down, inventories are up," explains Holcomb. "This means there’s an aggressive plan approach to having a good, solid inventory of raw materials in anticipation of a continuation of new orders. That’s generally a leading indicator in this environment — that our manufacturers are seeing strong order books, not just for this month, but for some horizon period into the future."

Employment

ISM’s Employment Index registered 55.5 percent in October, which is an increase of 0.9 percentage point when compared to the 54.6 percent reported in September. This is the 16th consecutive month of growth in employment. 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.

“As capacity is consumed by growth, the lead time for Maintenance, Repairs and Operating Supplies, as we see in the ISM report this month, has increased from 1 to 27 days, and while employment increased for the 16th consecutive month, manufacturers continue to struggle to attract and retain top talent,” says Rasmus. “Sixty percent of the manufacturers surveyed for a study we fielded with The Manufacturing Institute said it has been difficult to hire the skilled people they need, and that has costly ripple effects across their operations.”

Exports, Imports and Prices

ISM’s New Export Orders Index registered 51.5 percent in October, which is 2 percentage points lower than the 53.5 percent reported in September. October’s reading reflects growth in the level of exports for the 23rd consecutive month.

ISM’s Imports Index registered 54.5 percent in October, which is 1.5 percentage points higher than the 53 percent reported in September. This month’s reading represents 21 consecutive months of growth in imports.

"Starting with the imports, it continues to show that pricing and availability in selection of raw materials from abroad is favorable — and that might have something to do with exchange rates," says Holcomb. "On the other side, exports of finished goods, is down 2 percentage points, and that’s something we just have to watch. It’s still growing and still in good shape, but certainly something to watch relative to the global economy."

The ISM Prices Index registered 53.5 percent in October, which is a decrease of 6 percentage points compared to the September reading of 59.5 percent. In October, 21 percent of respondents reported paying higher prices, 14 percent reported paying lower prices, and 65 percent of supply executives reported paying the same prices as in September. A Prices Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices.

“I think this month’s PMI shows a strong manufacturing sector,” concludes Holcomb. “That has been building momentum all year long and we continue to be on that strong growth trajectory.”

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 of Supply Management, visitwww.ism.ws.

 

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