ISM reports a mild rebound in June manufacturing data

Following a month which saw its lowest levels since June 2009 and its first contraction since November 2012, manufacturing activity in June recovered some of its lost ground, according to the Institute for Supply Management’s monthly Manufacturing ISM Report on Business.

The PMI, the index used by the ISM to measure manufacturing activity—at 50.9 in June was ahead of May’s 49.0 by 1.9 percent and slightly ahead of April’s 50.7. June’s PMI is below the 12-month average of 51.2 and it has been over 50 in six of the last seven months.

Economic activity in the manufacturing sector had expanded for 34 straight months prior to contraction in June 2012, and overall economic activity has now expanded for 49 straight months and five times in the first six months of 2013, according to ISM.

New Orders, which are often referred to as the engine that drives manufacturing, recovered from a 3.5 percent drop in May with a 3.1 percent June gain. Production also saw a nice recovery, recovering from May’s 4.9 percent dip with a 4.8 percent increase. May showed contraction for the first time since August 2012 at 48.9 and was only the second time it has contracted since May 2009. Employment was essentially flat, falling 0.1 percent to 50.1. Employment fell 1.4 percent to 48.7.

“I think we are back on track, but the track is one of slow growth and slow improvement in general,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview.

The 3.1 percent increase in New Orders was viewed as welcome news by Holcomb, with gains in orders coming from 11 different industries, according to the report.

And when coupled with the near 5 percent Production pickup, these two metrics, said Holcomb, can be viewed as the two main drivers for June’s PMI increase.

“Looking closely at Production with a 4.8 percent increase, it is to some degree a reflection of working off a little more of the backlog (Backlog of Orders dipped 1.5 percent June to 46.5.) that is always controlled by production management,” explained Holcomb. “Collectively, New Orders and Production are floating this whole boat.”

In the respondent comments section of the report, a fabricated metal products respondent said that while business is stead, qualified CNC machinists are hard to find. Holcomb said this speaks to how, on the manufacturing employment side, certain manufacturing-based skill sets need to be upgraded over time as manufacturing becomes more technological.

He added that this month’s manufacturing number could simply be a brief pause in the long run.

Supplier Deliveries and Inventories both saw gains with Supplier Deliveries up 1.3 percent to 50 and Inventories up 1.5 percent to 50.5.

“Inventories have operated in a well-managed range this year between 46 percent and 50.5,” he said. “Any time there is a bit of a cautious approach; you see and feel slow growth and slow improvements, with companies doing what they have to have low inventories as a way to control costs and not to get caught with too much inventory in case new orders don’t materialize.”

June Prices rose 3.0 percent to 52.5. When prices go up gently in a controlled fashion, Holcomb said it is a reflection of supply and demand, and the fact that prices were sub-50 last month is not terrible but at the same time Holcomb said a longer-term deflationary trend is not welcome. Instead, stability and mild-control inflation is preferred.

When asked about the overall health of the manufacturing sector compared to a year ago, Holcomb said 2013 started out very similarly to 2012, with June and July showing healthy levels.

“The patterns are pretty similar so far,” he said. “We really are expecting and hoping for a better second half and there is reason to be cautiously optimistic about that, but we thought the same thing last year and the year before. It really is up to a whole lot of things beyond our control, regarding a number of things like the economy, weather, and Europe, among others. There is nothing here to indicate that we won’t have a good second half.”