New orders growth spurs strong manufacturing performance in August, reports ISM

While summer may be nearing its end, the climate in the manufacturing sector remains very warm, according to the most recent edition of the Manufacturing Report on Business issued today by the Institute for Supply Management (ISM).

The PMI, the ISM’s index to measure growth, headed up 1.9 percent to 59.0 in August (a PMI of 50 or greater represents growth), just shy of its highest reading since March 2011’s 59.1. What’s more, August’s PMI is 4.5 percent higher than the 12-month average of 55.5, and economic activity in the manufacturing sector has expanded for 15 straight months, with the overall economy growing for the 63rd straight month.

Three of the report’s four key metrics, including PMI, saw growth in July. New orders, commonly referred to as the engine that drives manufacturing, increased by 3.3 percent to 66.7 and has grown for 15 straight months. And it also reached its highest level since April 2004, a period of 10.5 years, when it climbed to 67.1. Production rose 3.3 percent to 64.5, and employment dipped 0.1 percent to 58.1, but is still in growth territory as the ISM notes an employment index above 50.6 is consistent with an increase in the Bureau of Labor Statistics manufacturing employment data.

“This PMI is a build-up of month-to-month growth since January,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee. “It is consistent with a strong growth trend and momentum in manufacturing, and it is backed by 17 of 18 manufacturing industries reporting growth. New orders are fueling a lot of this, with the August figure astounding, really.”

In describing the new orders number for August, Holcomb said it helps to take a global perspective, as China and the Eurozone are both in down periods at a time when the U.S. is going strongly.

This is also reflected in the ISM report’s exports numbers for August, which are up 2.0 percent to 55.0, and imports, which are up 4.0 percent at 56.0. These numbers, said Holcomb, show the strong flow of raw materials and finished goods across the oceans.

“What that says to me is that the world is looking to the U.S. for manufacturing more so than anywhere else and rightfully so,” he said. “We have a good thing going, and it has been going strong all year.”

Supplier deliveries were down 0.2 percent to 52.0 in August, and inventories grew by 3.5 percent to 52.0. Backlog of orders jumped up 3.0 percent to 52.5.

With backlog up 3.0 percent, Holcomb said that indicates that production could have been higher, had there been enough labor and assets.

“The fact that there is a strong backlog with a likely continuation of new orders suggests to me that this is going to continue for a while,” he explained. “Consumer confidence is also still at a strong level, which only helps. Every index is pointing in the right direction for us.”

That point was also made clear with comments in the report from ISM member respondents. A machinery respondent said that demand is strong, with numbers up over last year, and a primary metals respondent described market conditions as “awesome,” noting that August was the strongest month in years, with business solid.

When asked if the manufacturing sector was poised to finish 2014 strong, Holcomb said that the sector is on track to fulfill its previous forecast of 4-to-5 percent revenue growth, which he said represents solid growth.

“Barring any unforeseen exacerbation of hot spots, things should be fine and finish off the year very well,” he said.