This article first appeared in Industrial Distribution's May/June 2013 Issue. To view it in it's original format, please click here.
Although U.S. manufacturing declined in March, it continues a positive push into 2013
The Institute for Supply Management (ISM) Index registered 51.3 percent, a decrease of 2.9 percentage points from February’s reading of 54.2 percent, indicating expansion in manufacturing for the fourth consecutive month, but at a slower rate. Both the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, registering 51.4 and 52.2 percent, respectively. The Employment Index registered 54.2, an increase of 1.6 percentage points compared to February’s reading of 52.6 percent. The Prices Index decreased seven percentage points to 54.5, and the list of commodities up in price reflected far fewer items than in February. In addition, the Backlog of Orders, Exports, and Imports Indexes all grew in March.
“The drop in the PMI expansion is a normal variation,” says Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management Business Survey Committee. “If you look at the first three months of 2013 combined, we’re on a very good track. This is perhaps a little bit of a pause. Nevertheless, that 51.3 says March grew, but just not at the rates that we saw on the first two months. In addition, a lot of the supporting metrics are in positive territory. For example, exports and imports are really strong, showing the global economy is participating in a meaningful way.”
Orders, Production and Inventory
ISM’s New Orders Index registered 51.4 percent in March, a decrease of 6.4 percentage points when compared to the February reading of 57.8 percent. This represents growth in new orders for the third consecutive month. 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).
ISM’s Production Index registered 52.2 percent in March, which is a decrease of 5.4 percentage points when compared to the 57.6 percent reported in February. This indicates growth in production for the seventh consecutive month. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
“New orders are down a bit more than I would like to see,” adds Holcomb. “If you look at the specifics, 12 industries are showing growth in new orders and only two are reporting a decrease which means several are holding at 50 or above. The decrease in these indexes is not attributed to one specific thing. I think it’s fairly broad support for growth, just not as strong as we saw on the first couple of months. That’s not necessarily a bad thing because we can’t sustain continuous climbing. It’s more realistic to expect you can have some ups and downs along the way.”
The Inventories Index registered 49.5 percent in March, which is 2 percentage points lower than the 51.5 percent reported in February. This month’s reading indicates that respondents are reporting inventories are contracting in March, following two consecutive months of growth.
“The inventory index doesn’t indicate anything except for good inventory management,” explains Holcomb. “I would expect to see it a little bit below 50 percent for most of the year. That’s on purpose, as people want to contain costs and avoid getting caught with obsolete inventories.”
Exports, Imports and Prices
ISM’s New Export Orders Index registered 56 percent in March, which is 2.5 percentage points higher than the 53.5 percent reported in February. This month’s reading represents the fourth consecutive month of growth in new export orders, and follows six months of contraction dating back to June 2012.
ISM’s Imports Index registered 54 percent in March, which is the same reading as reported in February. This month’s reading indicates that import levels are growing for the third time in the past four months.
“The ISM index for exports did pick up in March,” said Daniel J. Meckstroth, chief economist for the Manufacturer’s Alliance for Productivity and Innovation (MAPI), “but it is hard to believe that net exports are driving manufacturing growth when Europe and Japan are in recession and China is just starting to accelerate after a growth slowdown last year. MAPI predicts that manufacturing production will perform only slightly better than overall GDP growth this year. Manufacturing industrial production is forecast to increase 2.2 percent in 2013 and accelerate to 3.6 percent growth in 2014.”
The ISM Prices Index registered 54.5 percent in March, which is a decrease of 7 percentage points compared to the February reading of 61.5 percent. In March, 21 percent of respondents reported paying higher prices, 12 percent reported paying lower prices, and 67 percent of supply executives reported paying the same prices as in February. 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 the decrease in prices is good and it’s also consistence with our December forecast,” says Holcomb. “Prices will, on the whole for the year, increase about two percent. Inflation is in check... and this is another indication of that.”
In his role as the chair of the Institute for Supply Management Manufacturing Business Survey Committee, Bradley J. Holcomb writes the monthly Manufacturing ISM Report on Business based on the survey results of approximately 350 professionals across 18 different industry sectors. For more information on the Institute of Supply Management, visit www.ism.ws.