January manufacturing data falls mildly but still growing, reports ISM

While sequential growth did not materialize to begin the year, manufacturing activity still remained in growth mode over all in January, according to the January edition of the Manufacturing Report on Business from the Institute for Supply Management (ISM).

ISM said that economic activity in the manufacturing sector has grown for 20 straight months, while the over all economy has shown growth for 70 months straight.

The PMI, the ISM’s index to measure growth, dipped 1.6 percent to 53.5 (a PMI of 50 or greater represents growth) in January, falling for the third straight month. Even with the most recent decline, the PMI is only 2.3 percent the 12-month average of 55.8. ISM also noted that 14 of the 18 industries it collects data from reported growth in January.

Each of the report’s key metrics, including the PMI, fell in January.

New orders, commonly referred to as the engine that drives manufacturing, saw a 4.9 percent decrease to 52.9. New orders have grown (at a level above 52.1) for 20 straight months but have fallen 10.1 percent going back to October 2014, when it was at 63.0.

Production dropped 1.2 percent to 56.5, coming off of October’s 64.8, while showing growth for the 11th straight month. Employment fell 1.9 percent to 54.1, growing for the 19th straight month.

ISM member-company purchasing managers comments in the report were largely positive about the current state of manufacturing. A food, beverage and tobacco respondent noted that strong customer demand was intact, with products growing, and a computer and electronic products respondent said that sales have remained strong even with the decline in oil prices.

The ongoing West Coast port labor issues remain an issue for domestic manufacturing and was highlighted by the report’s respondents.

“Chinese New Year, West Coast port dock slowdowns, coupled with railroad embargo are all creating logistical challenges and increased backlog of orders,” said a wood products respondent. And a chemical products respondent explained that the dock problems in California continue to delay shipment out of the West Coast.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said in an interview that January’s output was lower than analysts’ expectations but was still in growth mode.

“On the whole, we are in good shape and growing, but at the same time it is a reflection of some questions about unsettled nerves or unsettled financial analyses within companies largely concerning oil prices,” he said. “The fall in oil prices [for manufacturing] can be viewed as positive and negative…and is mostly positive in that it results in lower raw materials costs and also costs less to run our factories. The negative side is from the petroleum and related industries, which is about ten percent of what we cover. Their order rate for equipment and supplies and other things is clearly down, and if you put that all in balance it is still a positive, however, with that comes uncertainty about what it all means and how long it persists. There is some flavor of that in the report as well.”

In regards to the West Coast port issues, Holcomb said that while it is an issue at the moment, it is not a worse case scenario either.

The situation at West Coast ports, he said, is now at a point, where many, if not most, companies are looking at executing workaround plans to get shipments in and out of other ports or resorting to air shipments of raw materials and parts. These measures, though, add more costs and squeeze profit margins, too.

January supplier deliveries slipped 5.7 percent to 52.9 and showed that the delivery performance of suppliers to manufacturers slowed at a slower rate as a reading below 50 indicates faster deliveries and a reading above 50 indicates slower deliveries.

And inventories rose 5.5 percent to 51.0, and backlog of orders dropped 6.5 percent to 46.0.