ISM reports solid growth month for manufacturing in July

The Institute for Supply Management (ISM) reported today in its most recent edition of its Manufacturing Report on Business that manufacturing grew in July.

The PMI, the ISM’s index to measure growth, increased 1.8 percent to 57.1 in July (a PMI of 50 or greater represents growth). This is 1.8 percent higher than the 12-month average of 55.3. The PMI has grown in 18 of the last 20 months, with economic activity in the manufacturing sector expanding for the last 14 months as the overall economy was up for the 62nd consecutive month.

Each of the report’s key metrics, including PMI, saw growth in July. New orders, commonly referred to as the engine that drives manufacturing, increased by 4.5 percent to 63.4 and on a growth track for the 14th consecutive month. This is the highest percentage gain for new orders in 2014, matching August 2013, with June 2013 seeing a 6.1 percent gain.

“In this particular environment, the growth in new orders gives more strength to the positive trend manufacturing has been on,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee

Production headed up 1.2 percent to 61.2 and is up over the last five months, while employment rose 5.4 percent to 58.2 and up for the 13th straight month, posting its highest level since June 2011, and continues to show strength and momentum, Holcomb noted. This also matched up well with jobs data for July issued by the Department of Labor, which showed more than 200,000 jobs added for the sixth straight month.

Nearly all of the 18 manufacturing sectors featured in the report pointed to growth in July, with wood products representing the lone sector not growing for the month.

Comments from ISM member respondents in the report were mostly positive. A food, beverage, and tobacco respondent noted that things were “status quo…sales are okay (not great). Costs are generally flat.” And a computer and electronics respondent said that business conditions are still good in that industry, while a machinery respondent observed that the economy shows many signs of strength.

This data comes on the heels of the advance estimate for second quarter GDP issued by the Department of Commerce this week, which came in at 4.0 percent. Holcomb said that the average PMI for the second quarter at 55.2 correlates exactly in ISM’s analysis to 4.0 percent GDP growth.

Another notable trend within the report’s data is the difference between new orders at 63.4 and inventories, which dropped 4.5 percent to 48.5 in July, at 14.9, which Holcomb described as a “big number,” as inventories headed down, making supplier deliveries, which slowed down at a faster rate of 2.2 percent to 54.1 in July, slower, with pent-up demand for building inventories.

“The slowing in supplier deliveries is more about suppliers’ ability to keep up with demand from their customers, the manufacturers themselves, and it is a reflection of higher production, with the decline in inventories a reflection of high production and slower supplier deliveries,” he said. “But inventories will catch up, because there is always a concerted effort to have the right amount of inventory on hand. It is an indication of continuing a very good flow of new orders that will catch up.”

July prices were up 1.5 percent at 59.5, and backlog of orders rose 1.5 percent at 49.5.

Through the first seven months of the year, the cumulative PMI is 54.4, which is well into positive territory.

“Things are in a pretty good spot,” said Holcomb. “All the underlying data suggests there is no reason to believe this will not continue. But there are concerns about geopolitical unrest, which needs to be watched, but at the moment is not having a significant impact on our numbers.”