ISM reports a slight decline in November manufacturing index but sector remains in solid shape

The Institute of Supply Management (ISM) reported today that manufacturing activity for the month of November remained in a good spot.

The PMI, the ISM’s index to measure growth, declined 0.3 percent to 58.7 in November (a PMI of 50 or greater represents growth), with the November PMI 3.1 percent above the 12-month average of 55.6. And it is 0.4 percent below its highest reading, going back to the 59.1 recorded in March 2011. ISM also noted that 14 of the 18 industries it collects data from reported growth in November.

Three of the report’s key metrics, including the PMI, declined from October to November, according to ISM.

New orders, commonly referred to as the engine that drives manufacturing, headed up 0.2 percent to 66.0, checking in at its highest level since August’s 66.7 and showing growth for the 18th consecutive month. Production dropped 0.4 percent to 64.4, coming off of October’s 64.8, which is its highest level since the 65.3 recorded in May 2004 while showing growth for the ninth straight month. Employment fell 0.6 percent to 54.9 while showing growth for the 17th straight month.

ISM member-company purchasing managers comments in the report cited various positive economic developments as drivers for the strong position manufacturing continues to be in.

The holiday season is continuing to exceed expectations, with customers optimistic for future sales growth, a food, beverage and tobacco respondent noted, and a miscellaneous manufacturing respondent said that demand remains strong for new orders.

Conversely, though, the ongoing stalled West Coast port labor negotiations continue to negatively loom, with a fabricated metals respondent stating that demand continues to be solid, although deliveries through the West Coast are delayed due to various factors. And a transportation equipment respondent said that slowdowns and threats of a West Coast longshoremen going on strike weigh heavily on U.S. operations.

“The numbers in this report are all very strong and balanced and broad-based and very consistent with the trend we have set up all year,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “There is a lot to like in this report, considering it is only 0.3 percent off the high of the year of 59.0 that we saw in October and August. It is at a really high level.”

The key factors involved in this positive output, according to Holcomb, are new orders and strong production levels. The growth in new orders is supported by 11 of the industries tracked by ISM showing growth in that segment, with six staying even from October to November.

As a result of the strong new order output, Holcomb said production is “cranking away” in order to keep up the pace, but he said it is still lagging, due to the fact that November’s backlog of orders inched up 2.0 percent to 55.0.

“From a production standpoint, we are fully utilizing current labor and assets, particularly labor, which is a controlled process so in all likelihood we will finish strong in December, with backlog and new orders both up,” he said.

Inventories in November dipped 1.0 percent to 51.5, while customer inventories rose 2.0 percent to 50.0.

Holcomb said it is best to have those inventory levels a little bit higher, because when inventories are subtracted from new orders, the current difference based on November data is 14.5, with any difference higher than 5 becoming more noticeable or noteworthy.

“We would like to have higher supplier deliveries [November was up 0.6 percent at 56.8] to slow again, and there are plusses and minuses, but it is mostly all plus indicating tightness in the supply chain, and that is all fueled by continuing strong demand,” he explained.

Prices dropped 9 percent to 44.5 in November, with many of the decreases spurred on by falling fuel prices. Holcomb acknowledged that the 9 percent decrease is a big number and in terms of prices dropping below 50 that had not occurred since July 2013 with November’s prices at its lowest level since July 2012. Putting this 9 percent drop into better historical perspective, Holcomb said that the biggest swing recorded was a 14.5 percent increase in August 2012 and June 2012 prices were down 13.5 percent.

The decline in prices represents good news for most manufacturing stakeholders, as it equates to less energy and costs to run plants and facilities, as well as positive implications for raw materials like the resin base, steels, and coppers, and other commodities requiring a lot of energy to produce.