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ISM Manufacturing report shows strong growth in November for 16th straight month

By Jeff Berman, Group News Editor
December 01, 2010

The manufacturing sector remained on solid footing in November, according to the Institute for Supply Management (ISM).

The ISM’s Manufacturing Report on Business stated that the index the ISM uses to measure the manufacturing sector—also known as the PMI—was 56.6 percent in November, which was a 0.3 percent difference from October. Any reading that is 50 or better represents economic growth, and November represents the 16th consecutive month that the PMI is more than 50, along with the fact that the overall economy has been on a growth track for 19 straight months.

“The manufacturing sector grew during November, with both new orders and production continuing to expand,” said Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, in a statement. “With the PMI at 56.6 percent, November’s rate of growth is the second fastest in the last six months. Exports and imports continue to support expansion in the sector. Prices moderated slightly during the month, but comments from the respondents express concerns with regard to pricing pressures. The list of commodities in short supply increased, though short supply items are not yet posing significant problems. Manufacturing continues to benefit from the recovery in autos, but those industries reliant upon housing continue to struggle.”

Notable PMI readings from the November report include: New Orders at 56.6 percent (down 2.3 percent from October); Production at 55.0 percent (down 7.7 percent from October); Employment at 57.5 percent (down 0.2 percent from October); Inventories at 56.7 percent (up 2.8 percent from October); Backlog of Orders at 46.0 percent (even with October); and Prices at 69.5 percent (down 1.5 percent from October).

“The key takeaway here is that we have seen 16 consecutive months of growth in the manufacturing sector,” said Ore. “Much of the sector has made a major recovery…and 16 months ago, we were talking about the ‘new normal’ which was a very diminished level of demand. We have grown away from that, but we are still not back to where we were, but we are at very acceptable levels of demand. Many manufacturers are becoming profitable again, have repaired their balance sheets in many instances, and are able to make investments where they can find places to invest.”

Ore said the overall picture for manufacturing is encouraging, and November, in particular, is a continuation of the strength we have seen, on average, over the last six months, which is a significant rate of growth month-over-month.

But at the same time, he explained this positive growth does not equate into a complete recovery in manufacturing, which is what happens when all 18 sectors the PMI tracks are recovering. Instead, this recovery has been primarily focused on industries like technology and automotives, whereas sectors like housing, wood products, furniture, and textiles, and others like printing have not seen the same bounce.

“In past recoveries, we have seen much more strength in the overall economy,” said Ore. “The economy was not as devastated as it was during the most recent recession. We are heading in the right direction, but we are not heading there fast enough to get strong job creation. We are seeing some formation of job creation, but it is not of a great magnitude and probably won’t be for some time to come.”

While the PMI at 56.6 percent was down 0.3 percent from October, Ore said it would be a misnomer to describe it as being “flat.” The reason being that a 0.3 percent difference, coupled with the rate of change is not worth debating whether it is higher, the same, or lower.

Instead, he explained, both numbers are very good numbers for this stage of the recovery, in terms of the rate of growth that is taking place in manufacturing. This rate of change, Ore said, is constant.

Looking at the 7.7 percent drop in Production to 55.0, Ore said that it is more of a reversion to trend, as October’s 62.7 percent Production reading was more of an anomaly, which cannot be sustained at this point of the recovery.

“If we had seen New Orders drop precipitously also, that would have been of more concern,” said Ore. “New Orders are now stronger than production, which has not been the case in the past five-to-six months.”

On the Inventories’ side with a 2.8 percent gain and Customers’ Inventories up 1.5 percent, Ore said the growth in inventories has been quite significant, with the reason being that there was a “phenomenal de-stocking cycle” in which inventories dropped about $120 billion. And with the continued month-over-month growth occurring, he said manufacturers have had trouble replenishing their inventories to levels that are suitable for this level of operation.

He added it is likely that the Inventories’ index could drop below 50 in the next couple of months, which would provide an indication that inventories are balanced.

“Customers’ inventories are an indication of the supply chain and what is happening to customers’ inventories, and I think 45.5 percent in November is starting to show that the supply chain pipeline is starting to fill,” said Ore. “I would expect inventories to cut back and would be surprised if that does not happen. And as sales grow and production increases as we have seen, you have to increase inventories. You would like to grow sales without increasing inventories, but the reality is you may be able to change the ratio a bit but you cannot stop the growth of inventory because it takes higher levels of inventory to service higher levels of sales.”

Going forward, Ore said that given the amount of manufacturing momentum at the moment, there is reason to expect solid manufacturing growth through the first quarter of 2011, although it may not be at the same rate which is happening now. The reason for this, he said, is that Inventories may come down by as much as ten points, which would lower the average PMI by 2 points.

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).


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