ISM reports sustained manufacturing growth in February

Momentum in the manufacturing sector is continuing at a strong pace, based on the most recent results of the Institute for Supply Management’s (ISM) February Manufacturing Report on Business.

The index used by ISM to measure the manufacturing sector—known as the PMI—was 61.4 percent in February, which was up from January’s 60.8. This matches the highest PMI level since May 2004.

Any reading 50 or higher represents economic growth, and January is the 21th consecutive month economic growth has occurred, according to the report. February represents the seventh straight month of month-over-month growth in the manufacturing sector, according to the ISM.

“New orders and production, driven by strength in exports in particular, continue to drive the composite index (PMI),” said Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, in a statement. “New orders are growing significantly faster than inventories, and the Customers’ Inventories Index indicates supply chain inventories will require continuing replenishment. The Employment Index is above 60 percent for only the third time in the last decade. While there are many positive indicators, there is also concern as industries related to housing continue to struggle and the Prices Index indicates significant inflation of raw material costs across many commodities.”

In the February report, New Orders at 68.0 were up 0.2 percent, and Production at 66.3 was up 2.8 percent. Employment at 64.5 was up 2.8 percent. Inventories were down 3.6 percent at 48.8, and Customers’ Inventories at 40.0 were off by 5.5 percent. Backlog of orders was up 1.0 percent at 59.0, and Prices at 82.0 percent inched up 0.5 percent.

While the PMI matched its highest reading in nearly seven years, Ore explained that marketplace conditions for these two readings are “dramatically different,” as in 2004 the economy was emerging from the shadows of the Y2K Recession, followed by a solid 2002 recovery year and a not as good 2003. What’s more, in 2004, there was a lot of what Ore described as “buyer panic” for commodities, which resulted in a fair level of artificial demand.

But in 2011, he explained that supply is more closely lined up with demand, with global demand being fairly strong, and there is not as much concern over buyer demand driving economic activity.

“New Orders and Production both showed improvements over January,” said Ore. “These numbers are significantly better than I would have expected three months ago. We have seen seven consecutive months of [sequential] growth. I am not sure how long that can continue—or if it will even go another month—but it is not necessarily a bad thing if it does not.”

Given the current level of prices, coupled with pricing power, a little bit of a slowdown could be a good thing at this point, Ore explained.

While economic momentum from the holidays so far has carried into the New Year with consumer confidence hitting its highest levels in three years, Ore said close attention needs to be paid to oil prices in terms of how it could impact growth. Clarity with business tax code issues reported in December, though, should provide businesses with better ability to make decisions regarding investments.

“The dark cloud on the horizon now is what is going to happen in the Middle East and how much of an impact that is going to have on oil prices,” said Ore. “An economist told me that in his view an increase in oil prices is really a tax on growth. And the more oil and gasoline prices go up, the more we will see consumer confidence level off or drop, as well as available disposable income, which becomes a big issue for a lot of people.”

Looking at February’s inventory levels, Ore said while manufacturers spent 2010 trying to catch up on inventory, they did not get there based on the data. And with January and February posting strong numbers, he said there is a bit of an inventory liquidation occurring through a de-stocking of inventory because New Order levels are so high.

And with a 19.2 percentage point difference between New Orders and Production in February, Ore said that represents inventory levels being lost to current production.

“At that level, I would expect that there is some de-stocking taking place out of existing inventories, when inventories are being re-built,” he said.

While the ISM data is posting very positive numbers, Ore cautioned they are at very lofty levels, especially for metrics like New Orders, Production, and Employment. He said it is unlikely that the current growth rate can be sustained, and he said he fully expects to see the trend to start heading downward in the next few months.

“That is not necessarily a bad thing, because we are at very high levels, and the nature of this index is that once we get to this level it is going to start to drop off and trend downward,” said Ore.

ISM’s January manufacturing data shows strong momentum to begin 2011
January marks the highest level the PMI has seen since May 2004’s 61.4 percent
ISM reports strong manufacturing growth in December