ISM reports that manufacturing remains in growth mode in May

Manufacturing continues to provide consistent growth at a time when a majority of economic indicators remain skittish.

That was made clear in the Institute for Supply Management’s (ISM) May Manufacturing Report on Business which was released earlier today.

For the month of May, the PMI, ISM’s index used to measure manufacturing activity, was 53.5, which was 1.3 percent below April. A reading of 50 or higher indicates growth is occurring. Economic activity in the manufacturing sector has expanded for 34 straight months and overall economic activity has expanded for 36 straight months.
ISM reported that New Orders, which are commonly referred to as the ‘engine’ which drives manufacturing, were up 1.9 percent at 60.1 in May and are at its highest level since April 2011.

Production was down 5.4 percent at 55.6. Employment was down 0.4 percent at 56.9. Despite their respective declines, each of these metrics were in the 50’s, pointing to continued positive growth.

“The PMI was down modestly, which was not terrible,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “I don’t want to see it keep climbing ‘up, up, up,’ because we then can get kind of carried away and not healthy. This [PMI] is operating in a healthy range and is very consistent with what has been happening this year so far. It is a bit above the 12-month average of 53.1 and in really good territory.”

Holcomb said the increase in New Orders was broad-based, with gains in 13 of the 18 sectors ISM tracks.

Prices at 47.5 were down 13.5 percent, marking the first decline in 2012, with Holcomb noting that it was a “good news surprise” for manufacturing. This decline in pricing comes at a time when oil and gasoline prices are seeing recent decreases, with oil below $90 per barrel and gas well below $4 per gallon.

This subsequently impacts pricing for things like plastics, which are widespread across manufacturing and is viewed as welcome news he said.

May Supplier Deliveries dipped slightly, down 0.5 percent to 48.7, and Inventories fell 2.5 percent to 46.0.

This Inventory reading is the lowest level it has been at in 2012, according to ISM data. And coupled with the strong New Orders number, Holcomb said it demonstrates the need to build up inventory levels, which are then drawn down by suppliers.

“We often look at the ratio between New Orders and Inventories, which this month has a difference of 14.1, which is the strongest it has been since May 2010,” said Holcomb. “That means we are going to have to build up Inventories to satisfy New Orders.”

Supplier Deliveries, said Holcomb, remain directionally faster over the last four months, although he noted it is preferred to see a bit of a slower growth rate so Supplier Deliveries are not in as much of a catch up mode.

The uptick in deliveries shows continued confidence by raw materials suppliers to keep producing materials and not having strong inventories to accommodate faster deliveries, he explained. And manufacturing employment is still strong and needed to satisfy high New Orders levels.

“It is important to keep in mind that manufacturing represents about 12 percent of total GDP,” said Holcomb. “Our numbers will not translate into large numbers overall for something like employment. We have to look to the services sectors more so for that direct correlation.”

The overall strength of the manufacturing sector was reflected in comments made by ISM members in the report.

The comments pointed to steady and, in some cases, better than expected growth in some cases. Price relief was cited by a textile mills manufacturer as a driver for increased efficiency.

On a year-to-date basis, Holcomb said that manufacturing appears to be on track, especially when comparing the current outlook to what ISM was anticipating in December’s semiannual report it released.

“We predicted—and this was re-affirmed in the more recent semiannual report—that we would see continued growth in 2012, with revenues increasing 4.5 percent, and prices up only 2 percent,” he said. “There is a healthy margin opportunity there as well, which will continue to make manufacturing healthy and strong on a global basis. The U.S. and other manufacturing countries seem to be showing the strength and resilience that allows us to stand alone.”