ISM Report Indicates Economy Is Growing, Just More Slowly

Economic activity in the manufacturing sector expanded in May for the 22nd consecutive month, and the overall economy grew for the 24th straight month, according to the most recent Manufacturing ISM Report on Business.

Bradley J. Holcomb, CPSM, C.P.M.

The PMI (Purchasing Managers Index) registered 53.5 percent, a decrease of 6.9 percentage points when compared to last month’s reading of 60.4 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. A PMI in excess of 52.5 percent, over a period of time, generally indicates an expansion of the overall economy.

Bradley J. Holcomb, CPSM, C.P.M., chair of the ISM Manufacturing Business Survey Committee, recently spoke with Industrial Distribution about the data in the report, what it means to those in the manufacturing industry, and whether the decreasing growth should raise concern among manufacturers.

ID: It looks like the growth was a little bit slower this month. Is this an indication of an overall lessening of the recovery, or should we be expecting a ‘peaks and valleys’ type situation?

BH: 53.5 as a PMI is clearly off 6.9 points, but it’s still in the growth category, it’s just growing slower. The things that are primarily impacting the PMI are the softening of growth in new orders and production, which are both off around 10 points. But we have to keep in mind that in January, Feb, March, April, all of these important primary metrics were in the 60s, which is really strong. Companies are taking their foot off the accelerator a bit for the month of May. There’s a little bit of a cautionary note, and a little bit of a wait and see. Maybe they’ve overextended in some of these categories in the early part of the year, but nevertheless growth is continuing for 22 consecutive months. Another really bright spot—and there are a couple—employment at 58.2, which it’s off 4.5 points, it’s still a very strong number and close to the 12 month average of 59.5. There is continuing optimism there. Customer inventories—the indicator is too low, at 39.5 and that’s good because there is still room for re-stocking, in terms of finished goods for our customers.

Prices are continuing to increase, but at a considerably slower rate. In other words, at 76.5, it’s off 9 percentage points from last month, and I’m sure everyone is hopeful that that trend will continue. If there’s one thing throughout this whole mix that people are referring to is continuing cost pressures in raw materials, energy components, transportation… virtually every material purchased. But there is a little bit of softening with the increases. We list commodities up in price, and this month there are several new entries. It’s pretty broad-based, but hopefully there is a little bit of a sign that things are easing.

ID: In terms of some of that softening of production, is that still related to any of the natural disasters overseas slowing down the supply chain?

BH: It’s interesting because we’ve scanned through all of the comments in the transportation area and what people are saying is, ‘yes, there has been an impact from the situation in Japan, but it’s not as widespread or extended as originally thought.’ They’re finding ways to work around it for the most part, according to our respondents.

ID: And for those manufacturers with a global footprint, how is some of the foreign inflation affecting them?

BH: If we look at our exports and imports, we can impute some of those things. Exports are down a little bit—7 points. It’s been very strong at 55, it’s down 7 points, but it’s just below the 12 months average of 57.7. So we have continuing strength there where it’s still growing, but growing a little bit slower. We’re having some impact, but it’s really too early to tell. On the imports side, there was a modest decline of 1 percent from last month at 54.5. There are fairly consistent measures there.

ID: Are there any other major takeaways for manufacturers and distributors?

BH: I guess our overall sentiment here is continuing growth and cautious optimism, going forward over the next few months. We’re seeing some declines in these metrics for the first time this year, but it’s only one data point. Let’s not get ahead of ourselves; let’s wait until next month before we read too much into this.

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