Economic activity in the manufacturing sector expanded in February for the 26th consecutive month, and the overall economy grew for the 69th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
Manufacturing expanded in February as the PMI registered 52.9 percent, a decrease of 0.6 percentage point when compared to January’s reading of 53.5 percent, indicating growth in manufacturing for the 26th consecutive month. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee states, “The past relationship between the PMI and the overall economy indicates that the average PMI for January and February (53.2 percent) corresponds to a 3.2 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for February (52.9 percent) is annualized, it corresponds to a 3.1 percent increase in real GDP annually.”
“Manufacturing activity grew in February according to the latest ISM report,” notes Don Norman, director of economic studies for the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation. “However, the index, while still above 50 (the dividing line between growth and expansion), slipped once again by 0.6 percentage points to 52.9. The index for production fell by 2.8 percentage points while the index for new orders fell by 0.4 percentage points. Manufacturing is expected to grow in 2015 but it is getting off to a slow start.”
A PMI in excess of 43.1 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the February PMI indicates growth for the 69th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the 26th consecutive month.
Orders, Production and Inventory
“ISM’s February report is fairly consistent with recent government data showing manufacturing output increasing at a moderate pace,” Norman adds. “The Federal Reserve Board’s industrial production index for manufacturing increased by just 0.2 percent in January. On a year-over-year basis, however, manufacturing output was up 5.6 percent. The U.S. Census Bureau reported that new orders for manufactured goods (excluding defense) increased by 3 percent in January while shipments of durable goods were down by 1.5 percent and unfilled orders decreased by 0.9 percent.”
ISM’s New Orders Index registered 52.5 percent in February, a decrease of 0.4 percentage point when compared to the January reading of 52.9 percent, indicating growth in new orders for the 27th 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).
“New Orders is always what we like to count on, and it doesn’t always happen,” says Holcomb. “I think we’re off to a slower start then we would have predicted. Then again, 10 of our 18 industries are reporting growth in new orders, with four reporting a decrease — and most of those are not large industries — so there’s still broad based support for new orders, and we’ll hope for more as the months go by.”
ISM’s Production Index registered 53.7 percent in February, which is a decrease of 2.8 percentage points when compared to the 56.5 percent reported in January, indicating growth in production for the 30th consecutive month. An index above 51.1 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
“I think production being down is potentially weather related,” says Holcomb. “Not a lot of employees in the Northeast – where a lot of our manufacturing exists – could get to work every day and some plants closed down too. I think that’s potentially impacting both production and employment.”
ISM’s Backlog of Orders Index registered 51.5 percent in February, which is 5.5 percentage points higher than the 46 percent reported in January, indicating expansion in order backlogs following one month of contraction in order backlogs. Of the 86 percent of respondents who reported their backlog of orders, 23 percent reported greater backlogs, 20 percent reported smaller backlogs, and 57 percent reported no change from January.
The Inventories Index registered 52.5 percent in February, which is 1.5 percentage points higher than the 51 percent registered in January, indicating raw materials inventories are growing for the second consecutive month. 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).
“At 52.5, the Inventories Index is certainly on a broad level well within the parameters of good inventory management,” explains Holcomb. “Plus or minus 2.5 points around that 50 mark is good. But I think this could potentially represent a bit of a mismatch in inventories. One of the West Coast port impacts has been to get parts delivered out of sequence. We can get a container of parts that is not in line with the latest lot numbers or part numbers and that sort of thing. But the West Coast port situation is getting cleared up over the next few weeks.”
Exports, Imports and Prices
ISM’s New Export Orders Index registered 48.5 percent in February, which is 1 percentage point lower than the 49.5 percent reported in January. February’s reading reflects the second consecutive month of contraction in the level of exports, following 25 consecutive months of growth in new export orders.
ISM’s Imports Index registered 54 percent in February, which is 1.5 percentage points lower than the 55.5 percent reported in January. This month’s reading represents 25 consecutive months of growth in imports.
“Imports have been pretty consistent around mid-50s level for some time, and that is a reflection of a continuous stream of imported raw materials from abroad,” indicates Holcomb. “On the other hand, think of exports as being impacted more by two things. First, the West Coast port situation — where people stopped ordering finished goods because they know they won’t get them. The second thing is the stronger U.S. dollar certainly has some impact because our finished goods become more expensive. But that’s an adjustment that the world will reckon with in due time, because they do love our products.”
The ISM Prices Index registered 35 percent in February, the same reading as in January, indicating a decrease in raw materials prices for the fourth consecutive month. In February, 8 percent of respondents reported paying higher prices, 38 percent reported paying lower prices, and 54 percent of supply executives reported paying the same prices as in January. A Prices Index above 52.1 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 51.4 percent in February, which is a decrease of 2.7 percentage points when compared to the 54.1 percent reported in January. This is the 21st 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.
“The ISM attributes the slowdown in growth in part to concerns about the possible closing of West Coast ports, an issue that now appears to be resolved,” Norman concludes. “Other factors that contributed to slower growth include another severe winter in much of the country, continued sluggish growth in Europe, and the rise in the value of the dollar against the euro. Lower gasoline and heating prices have spurred consumer spending and are a net plus for the economy. However, some of this increased spending has been reflected in rising imports rather than domestically produced goods. In addition, lower prices of crude oil and natural gas are curtailing development activity, which in turn is reducing the demand for manufactured products used in such development.”
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. 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, visit www.ism.ws.