Manufacturing activity begins 2013 on a solid note, reports ISM

Manufacturing growth began 2013 on a strong note in January, according to the January Manufacturing report on Business from the Institute for Supply Management (ISM).

The PMI, the index used by the ISM to measure manufacturing activity, was 53.1 in January, which tops December by 2.9 percent. A reading of 50 or higher indicates growth is occurring, and the PMI has now been over the 50 mark for the last two months. Economic activity in the manufacturing sector had expanded for 34 straight months prior to contraction in June and overall economic activity has expanded for 44 straight months, according to ISM.

Including the PMI, the report’s four key metrics all were healthy in January.

New Orders, which are commonly referred to as the ‘engine’ which drives manufacturing, were up 3.6 percent at 53.3 and remain in growth territory and are above 50 for the fifth straight month—in terms of overall growth—following three months of contraction. Production was up 1.0 percent to 53.6, while Employment rose 2.1 percent to 54.0.

“We are pleasantly looking at some very solid numbers across the board,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “All of the report’s key metrics are above 50 and feeding into the total PMI and beating estimates. That is a pretty good way to start 2013.”

This data comes at a time when employment numbers are getting some decent traction and the housing market continues to improve as well, with other various facets of the economy trending in the right direction, such as automobile sales.

Holcomb said in order for that trend to continue there needs to be support and cooperation from the global economy and in Washington, D.C., too, as there are immediate issues like the debt ceiling and long-term ones such as the U.S. deficit that need to be addressed.

And while the Fiscal Cliff talks came to an agreement at the beginning of the year, the subsequent impact U.S. households seeing an increase in payroll taxes and a decrease in take home pay remains to be fully seen and is a concern of manufacturers.

January Inventories jumped up 8.0 percent to 51.0, and Supplier Deliveries fell 0.1 percent to 53.6.

“Supplier Deliveries above 50 represents slower deliveries, which is a good thing because it shows tightness in the supply system and shows that suppliers need to build inventory and perhaps add jobs to keep up and support manufacturing,” said Holcomb. “It is a positive for PMI.”

Regarding Inventories, he explained that at year-end companies work very hard to reduce their inventories so their books look as good as possible at that time, noting that adding inventory in January is not unusual.

What’s more, he said that increased inventory in January can be viewed as a solid response to New Orders and production requirements.

Prices in January headed up 1.0 percent to 56.5. Prices heading up early in the year are standard, said Holcomb, as suppliers come in and try to float increases. He added that ISM maintains prices will not rise significantly throughout the year.

Backlog of Orders fell 1.0 percent to 47.5. The combination of high New Orders and order backlog being close to 50 is encouraging, according to Holcomb.

Given some of the positive economic headwinds early into 2013 compared to recent years, Holcomb said the outlook in the manufacturing sector is encouraging.

“Looking at data from 2008-2012, it shows that January in each year was always up relative to the prior December, with February down at least a little bit,” he said. “Even with the positive signs, there are things to keep an eye on and we are positive about 2013.”