August manufacturing output remains strong, reports ISM

August manufacturing activity remained solid, according to data issued in the Institute for Supply Management’s (ISM) monthly Manufacturing Report on Business, which was released earlier today.

The PMI, the index used by the ISM to measure growth, came in at 58.8 (a reading of 50 or higher indicates growth) in August, which was 2.5% ahead of July. The PMI has grown for the last 12 months, while the over all economy has been up for the last 98 months. What’s more, the August PMI is at its highest level since August 2011, when it hit 59.1. And the August PMI is 3.4% above the 12-month average of 55.4 and 2.1% above the 2017 average of 56.7.

ISM said that 14 of the 18 manufacturing sectors contributing to the report grew in August, including: Textile Mills; Petroleum & Coal Products; Machinery; Transportation Equipment; Fabricated Metal Products; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Chemical Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Printing & Related Support Activities; and Food, Beverage & Tobacco Products. Three industries reported contraction in August compared to July: Apparel, Leather & Allied Products; Primary Metals; and Furniture & Related Products.

Including the PMI, three of the four core PMI metrics saw gains in August.

New orders, which are commonly viewed as the engine driving manufacturing, were essentially flat, dipping 0.1% to 60.3, with new orders up for the 12th consecutive month and order input remaining at a strong pace that is consistent with the last four months of order activity.

Production remained strong, heading up 0.4% to 61.0 (a reading of 51.4 indicates growth and is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures), also growing for the 12th consecutive month. ISM noted that despite supplier delivery constraints, production remains at strong growth levels in most industries. August supplier deliveries checked in at 57.1 (a reading of 50 or higher indicates contraction) in August, a 1.7% difference increase compared to July. Supplier deliveries have been slowing for the last 16 months.

Employment saw an impressive 4.7% gain to 59.9, growing for the 11th consecutive month. This is its highest level since June 2011’s reading of 61.3.

Other key readings in the August report included inventories rising 5.5% to 55.5 for its highest reading since September 2010’s 56.

Comments submitted in the report by ISM member respondents were overwhelmingly positive.

A chemical products respondent cited steady demand across businesses, and a miscellaneous manufacturing respondent commented that there is overall optimism about the market for 2017 and 2018. 

ISM Manufacturing Committee Chair Tim Fiore said that this report is impressive on a few fronts, one being that it represents a ten point annual improvement, coupled with strong order intake, production expanding at the same level as July, and employment making major strides and helping to support the production number.

“The employment number was something we have not seen in a long time in terms of the rate of change,” he said. “The supplier deliveries number showed that suppliers are struggling more to keep up. And the inventory number showed that manufacturers took in more stuff than they wanted to or they called for more stuff to be delivered. If I look at the other [key metrics in the report, it speaks to the latter in anticipation of September. When the inventory number is high, it adds to the PMI. The algorithm number for the PMI is set up around a high inventory number as a good inventory number.”

Customer inventories dropped 8% to 41 to its lowest level in seven years. This suggests, said Fiore, that customer inventory levels are far too low, which means there is demand to satisfy and production output has a place to go in that not only does a customer have the demand to deliver to its customer but also that they have a need to stock up more.

Backlog of orders increased 2.5% to 57.5, heading up for the seventh month.

“That says that even in spite of all the good orders that came in, there is still a really strong backlog to satisfy,” said Fiore. “It’s a really positive number.”

August prices were flat at 62.0, staying in growth mode for the 18th consecutive month, which Fiore said remained strong.

“We are seeing price increases everywhere [for different commodities],” he said. “It means either companies don’t have the capacity to satisfy their entire needs and therefore have a ‘normal’ price. There is demand and that is why prices are so high. Ignoring the hurricane effect, this is a really strong month for pricing.”

IHS Markit analyst Michael Montgomery wrote in a research note that the August ISM data highlights manufacturing's potential, but that potential will struggle with a Harvey-based reality for a few months.

“The global manufacturing recovery will keep rolling, but disruptions caused by Hurricane Harvey will warp August and September output data. Supply disruptions will rock oil refining (3.0% of industrial production last year), and the chemicals industry (12.4% of industrial production in 2016),” he stated. “Those two industries are dominant in Harvey-flooded areas. Storm damage had limited time to drag down August, but recovery will be sluggish in the September numbers; if industrial production was available twice per month rather than monthly, the first half of September would be truly ugly. The manufacturing world is in good shape headed into the last third of 2017, but Mother Nature is demanding a breather. The ISM manufacturing report for August is more a portrait of what might have been than the reality that will happen, thanks to Harvey. The important message is that the normal rules do not apply in the short term when events of this magnitude happen in key parts of key industries. September manufacturing could have been a contender; instead, it will throw in the towel. The fourth quarter should see solid gains plus a recovery bump to growth.”