ISM’s January manufacturing data shows strong momentum to begin 2011

Building on the success of a solid 2010, the manufacturing sector is off to a promising start in 2011, according to the Institute of Supply Management’s January Manufacturing Report on Business.

The ISM reported that the index it uses to measure the manufacturing sector—also known as the PMI—was 60.8 percent in January, which is 2.3 percent of December’s 58.5 and marks the highest level the PMI has seen since May 2004’s 61.4 percent. Any reading 50 or higher represents economic growth, and January is the 20th consecutive month economic growth has occurred, according to the report. January’s strong showing also marks the sixth straight month of month-over-month growth in the manufacturing sector, according to the ISM.

“The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector,” said Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, in a statement. “New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004. Global demand is driving commodity prices higher, particularly for energy, metals and chemicals.”

In the January report, New Orders at 67.8 were up 5.8 percent, and Production at 63.5 was up 0.5 percent. Employment at 61.7 was up 2.8 percent. Inventories were up 0.6 percent at 52.4, and Customers’ Inventories at 45.5 saw a 5.5 percent gain. Backlog of orders was up 11.0 percent at 58.0, and Prices at 81.5 percent rose 9.0 percent.

Ore told Modern in an interview that this report is part of a larger trend pointing to positive economic activity in the manufacturing sector. He added it comes on the heels of a strong 2010 whose PMI averaged 57.3, marking the third highest PMI in the last 20 years next to 1994 and 2004.

“Part of the reason we saw a strong January was that the consumer showed up for the Holiday Season, which helped tremendously,” said Ore. “The other thing that helped was the clarity that was achieved over the tax code. People hit January with expectations for a good year and continuing growth, and the general climate was greatly improved.”

With customers’ inventories up 5.5 percent, the report’s respondents noted that they felt this number remains too low. Ore said that the inventories’ issue is one of the more difficult things to analyze during this economic recovery.

The reason for this, he said, is that there have been several months of growth in inventories, but it is obvious that manufacturers reduced inventory so dramatically that they have spent 2010 trying to catch up.

“I would take the most recent reading on customers’ inventories to indicate that supply chains are getting close to the level that they would like to see where they are getting more comfortable with their inventory level,” said Ore. “I think we will also see minor growth in inventories on a monthly level going forward, with people dropping their inventories back to more of a business as usual level.”

With New Orders and Production both above 60, Ore said that the strength in manufacturing being carried into the first quarter—even if the other two months of the first quarter are not as strong as January—the first quarter and first half of the year look to be strong, as opposed to previous expectations indicating that true growth would not occur until the second half of the year.”

“Our initial expectations are not nearly as strong as these numbers are,” said Ore. “I think we will see a strong first quarter, which could carry the first half of the year. We have had a lift in confidence, but I think there is still a lack of confidence in the federal government in dealing with deficits. And that could wear thin as we get deeper into the year, as people could have concerns about the ability of the Congress to deal with budget issues and could be a constraint in the second half of the year. But we are off to a very good start to the year although it has to level off at some point. If we average a PMI of 53.5-to-54 for the year, we would be very happy.”

Ore said these positive manufacturing cycles generally last from 70-to-110 months, and there is an expectation that with 18 months of manufacturing growth in the books, it is realistic to expect another 12 at this point through the end of 2011.