ISM reports manufacturing output finishes 2012 on a high note

Manufacturing output showed growth in December for the third time in the last seven months, according to today’s December Manufacturing Report on Business from the Institute for Supply Management (ISM).

The PMI, the index used by the ISM to measure manufacturing activity, was 50.7 in December, representing a 1.2 percent gain over November’s 49.5, which was the lowest level for the PMI since July 2009, when it dropped to 49.2. A reading of 50 or higher indicates growth is occurring. Economic activity in the manufacturing sector had expanded for 34 straight months prior to June’s contraction and overall economic activity has expanded for 43 straight months. December’s PMI was 4.1 percent below the 12-month average of 51.7.

The report’s key metrics were mostly positive.

New Orders, which often are referred to as the ‘engine’ which drives manufacturing, were flat at 50.3 and remain in growth territory and are above 50 for the fourth straight month—in terms of overall growth—following three months of contraction. Production was down 1.1 percent to 52.6, while Employment rose 4.3 percent to 52.7.

“I am delighted to see the PMI above 50, closing out the year in positive territory,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “And all of the ‘anchor’ indices—New Orders, Production, Employment, Supplier Deliveries [up 4.4 percent to 54.7]—were all above 50. The only one down was Inventories [down 2.0 percent to 43.0 to its lowest point since September 2009], which is really not a bad thing. You generally see inventories down at the end of the year as manufacturers try to reduce costs. It means that they will go back up and also set the stage for a good beginning to 2013.”

Addressing the 4.3 percent gain in Employment, Holcomb said part of that is undoubtedly due to seasonal holiday hiring to some degree, noting that it has only dipped below 50 once in last 40 months.

Prices rose 3.0 percent to 55.5, which suggests that pricing is really in control, explained Holcomb, with pricing of raw materials not a major concern. Backlog of Orders headed up 7.5 percent to 48.5, due to the fact that New Orders were not as strong as they have been in the past, coupled with strong Production utilization.

“For this to jump back up is a positive and favorable,” said Holcomb. “If New Orders don’t materialize as strongly as we like, then there is a backlog to work off of.”

ISM member respondents comments in the report were more optimistic than not. A respondent in the Miscellaneous Manufacturing said that his firm is seeing stabilization in orders and costs and production capacity for the first time in months. And a wood products respondent said that prices and orders were staying stronger than normal for December, which he said was a pleasant surprise.

Exports and imports were up 4.5 percent and 3.5 percent, respectively, each checking in at 51.5. Over the last four-to-six months, they have been in what Holcomb said was contraction territory prior to finishing the year strong, due to year-end activity by manufacturers.

What’s more, while a month ago a top of mind concern for manufacturing and the economy was the uncertainty of the Fiscal Cliff. But with Congress and the White House coming together on a deal yesterday, Holcomb said that bodes well for the economy.

“It clears the air somewhat, but it was so frustrating on the way there,” he said.

With 2013 underway, Holcomb said if the housing market continues on a solid path, it could bode well for the manufacturing sector and serves as a positive signal.