Manufacturing growth finishes first half of 2015 on solid footing, reports ISM

The Institute for Supply Management (ISM) reported today that manufacturing activity for June showed growth compared to May, albeit at a slow rate.

The PMI, the ISM’s index to measure growth inched up 0.7 percent to 53.5 over May’s 52.8 (a PMI of 50 or greater represents growth). This reading marks sequential growth for the third month in a row, which was preceded by five months of sequential declines, which had been in effect since October 2014. PMI growth has been at 50 or higher for 30 straight months, and the current PMI is 1.2 percent below the 12-month average of 54.7.

Economic activity in the manufacturing sector has been in expansion mode for 30 straight months, with the overall economy growing for 73 months. Including the PMI, three of the report’s four key metrics were up in June, according to the report.

Showing growth were new orders, which are often referred to as the engine driving manufacturing, up 0.2 percent to 56.0 and growing for the 31st straight month while reaching a new 2015 high, and employment rose 3.8 percent, which was in line with May’s 3.4 percent jump and growing for the second straight month. The current employment reading is consistent with the ISM’s employment growth baseline of 50.6, as well as being the largest uptick in employment since 2009. Production was the lone key metric in decline, down 0.5 percent to 54.0, with overall production growth remaining intact for the 54th consecutive month.

The ISM said in the report that 11 of the 18 manufacturing sectors reporting into the ISM grew in June, which was down from 14 in May.

Comments submitted to the report by ISM member respondents were mostly positive. A fabricated metals respondent stated that the automotive industry remains strong and is expected to stay that way through 2015, and a chemical products respondent said that manufacturing business has improved slightly. A machinery respondent cited things being “a bit slow,” with sales down compared to last year.

“I like this report, considering that it matches the highest level for 2015 so far [January also came in at 53.5],” said Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee. “The current direction of manufacturing, and the global economy aside from Greece and Puerto Rico, is in reasonably good shape, with not too many clouds in front of us as there have been behind us.”

Holcomb cited the strong employment number for June, explaining that growing employment in manufacturing is a good sign that order books are filling up.

When looking at manufacturing through the first six months of 2015, Holcomb described it as showing moderate growth and also resilient in the face of things like the West Coast port labor situation, which strained supply chains in various ways, bad weather, and the strong dollar, among others.

“Manufacturing really hung in there to a large degree through all of that and is now popping up, with those things dissipated” he said. “We will see what happens going forward, but I think we are set up for good things to come.”

June supplier deliveries dropped 1.9 percent to 48.8, with a reading below 50 indicating faster deliveries, and inventories were up 1.5 percent at 53.0.

Supplier deliveries being faster is not ideal, as Holcomb said it is better to see them moving at a slower rate in a robust economy. He said this serves as a possible sign that the West Coast port labor situation has been largely resolved, with things flowing better and suppliers getting their products moved more efficiently on the import side.

As for inventories, he said the gain points to manufacturers still building inventories, with faster supplier deliveries indicating shelves are being stocked at a quicker pace while still in a fine operating range.

Prices in June remained flat at 49.5, and backlog of orders contracted at 47.0, down 6.5 percent.

“What is happening with prices is driven by oil and gas is unusual,” noted Holcomb. “To be below 50 for the first six months of the year could be unprecedented, as we are usually getting price increases. Things have started to stabilize with respect to oil, and the new short-term reality of oil prices is unusual and essentially deflationary from that point of that metric. It is good for business and opens up margins and healthy for profits and profitability when you can keep some of those savings you are getting from suppliers and not pass them on entirely to customers or consumers. It is good for this period of time but not sustainable.”