Logistics business: ISM manufacturing index is down but still showing growth signs

The Institute of Supply Management reported today that while manufacturing activity in June was not as strong as it was in May, the economic recovery is moving forward.

The index the ISM uses to measure the manufacturing sector, or PMI, was 56.2 percent in June, which is down from 59.7 percent in May and 60.4 percent in April. Any reading that is 50 or better represents economic growth. June represents the 11th consecutive month that the PMI is more than 50, coupled with the overall economy on a growth track for 14 straight months.

Norbert J. Ore, chair of the ISM’s Manufacturing Business Survey Committee said in a statement that the manufacturing sector continued to grow during June; however, the rate of growth as indicated by the PMI slowed when compared to May.

“We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time. The sector appears to be solidly entrenched in the recovery. Comments from the respondents remain generally positive, but expectations have been that the second half of the year will not be as strong in terms of the rate of growth, and June appears to validate that forecast.”

Other notable metrics from the June report are: employment at 57.8 percent compared to 59.8 percent in May; supplier deliveries at 57.3 percent compared to 61.0 in May; inventories at 45.8 percent compared to 45.6 percent in May and prices at 57.0 percent compared to 77.0 percent in May.

The ISM also reported that 13 of the 18 manufacturing industries it tracks showed growth in June, down from 16 in May.

In an interview, Ore said that the fact that the PMI was down again is not a huge cause for concern.

“When [this] is down, there is a natural tendency to think things are slowing down,” said Ore. “But I don’t think that is a good description. At 56.2 percent, you still have very robust growth in manufacturing. If the whole economy were doing as well as manufacturing is, it would be growing at 4.9 percent. But the whole economy is not tracking with manufacturing this time around, with sectors like services and small businesses that are lagging behind, which is part of the reason we are seeing overall growth lag behind manufacturing.”

Reasons for sustained manufacturing growth cited by Ore include reduced inventories, lower payrolls, a slowdown in investment, and shutting capacity, and firm pricing, which led to leaner operations.

This allowed manufacturers to be lean and efficient, which Ore said has not occurred in other industries.

Taking a closer look at the inventory numbers, Ore said that we have gone through a significant de-stocking phase to begin with and now are in restocking mode, with most manufacturers reaching a balance with regard to restocking. The only industry that struggled with this he said was computers and electronics, which is experiencing shortages due to a high number of SKU’s that were not manufactured during the slowdown due to low demand.

Looking towards the second half of 2010, Ore said ISM’s April numbers indicated the second half of 2010 would not be as strong as the first half, in terms of the overall growth rate.

“I think that was a reasonable expectation,” said Ore. “When I assess the economy, I look at three major sectors: automobile, housing, and technology. Technology is doing well. Housing has failed to ever get going. Auto picked up during the first half of the year and is likely to stay the same or fall off slightly in the second half. And the consumer has been terrorized and is not likely to jump back in.”

The second half is likely to be a challenge, according to Ore, although he does not expect a double-dip recession to occur. Instead, there is the risk of softer consumer demand in the second half.