ISM reports growth in March manufacturing, despite decline in index

Despite across the board decline for its key metrics, data issued today by the Institute for Supply Management (ISM) continues to show that the underlying fundamentals for the manufacturing sector remain positive.

In its monthly Manufacturing Report on Business, ISM said that PMI, the report’s key metric, fell 1.5% in March to 59.3 (a reading of 50 or higher indicates growth). This marks the 19th consecutive month of PMI growth, with the overall economy now having grown for 107 straight months. What’s more, March’s PMI reading comes on the heels of February’s 60.8, which was the highest PMI reading since the 61.4 recorded in May 2004. And the March reading is 1.1% above the 12-month average of 58.2. The PMI average for the first quarter of 2017 is 59.7.

ISM said that 17 of the 18 sectors it tracks experienced growth in March, including:  Fabricated Metal Products; Plastics & Rubber Products; Computer & Electronic Products; Paper Products; Printing & Related Support Activities; Nonmetallic Mineral Products; Transportation Equipment; Petroleum & Coal Products; Wood Products; Machinery; Chemical Products; Textile Mills; Electrical Equipment, Appliances & Components; Furniture & Related Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Primary Metals. The only industry that saw a decline was Apparel, Leather & Allied Products.

Each of the report’s key metrics, including the PMI, was down in March.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 2.3% to a still-impressive 61.9 in March, while remaining on the right side of growth for the 27th month in a row. And new orders have been at or above the 60 mark for the last 11 months, with 15 of the 18 manufacturing sectors seeing new order growth in March.

Production was off 1% to 61 and still grew for the 19th consecutive month and has been at or above the 60 mark for the last ten months. Employment fell 2.4% to 57.3 and remained in growth mode for the 18th month in a row. Inventories were off 1.2% to 55.5 and up for the third month in a row.

ISM member comments included in the report touched upon various things impacting the manufacturing sectors, including tariffs, global demand, and transportation issues, among others.

A food, beverage and tobacco products respondent pointed to an ongoing struggle to find carriers and drivers for shipments. And a miscellaneous manufacturing respondent said that new tariffs are causing concern across the supply chain.

In an interview, Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee, said that despite the sequential declines, manufacturing remains in a good place.

“New orders and production are both still above 60 for several months…even with a slight decline in expansion,” he said. “With customer inventories (down 1.7% to 42) at its lowest level since 2011, production was not able to satisfy customer inventory demand, and backlog of orders (which was flat at 59.8) remains at record 2011 levels. Overall, I think demand is pretty good, even with a slight decline in new orders over the last four months, customer inventories down, and backlogs at still very high levels, so there is lots of opportunity to produce.”

And with manufacturing production, which is dealing with labor shortages, skills, and other things, Fiore said that the employment side is really restricting the sector’s ability to perform.

“The real message for March is that we have gone from a demand consumption-driven PMI to an input-driven PMI,” he said. “The reason I say that is we are at the same 59.3 that we were in December, but the makeup of the five sub-indexes is quite different. Even though it looks like we are at the same level as December, we are really not.”

When adding up new orders and production totals up, he said there is a 9.7-point contraction contraction since December, and when taking the supplier deliveries and inventories for the same period, there is a 10.4-point gain.

“That is why there was a 59.3 reading in March that is not the same as a 59.3 in December,” he said. “Demand is fine and not a concern. What this is really saying is we are maintaining really high PMI levels, because suppliers are continuing to struggle to deliver, whether it be because of the new tariffs or transportation issues or whether it is sub-suppliers who can’t hire the proper amount of people or cannot get the right skills. It is primarily being reflected in the inventory count, which is up 7 points since December. Inventory tends to be where all the ‘ugliness’ gets reflected. Inventories are what’s driving it up, and that is what you expect inventories to do….is be negatively impacted really by inefficiencies in the supply chain and suppliers struggling to deliver.”  

One thing to look out for in the manufacturing sector, aside from the employment and labor situation, according to Fiore, are tariffs as they relate to costs, lead times, and delivery access, according to Fiore.

And another is transportation-related issues, with the ongoing issues relating to the shortage of truck drivers and equipment, increasing freight rates, global air cargo rates heading up, labor and tariffs and related supply chain issues.

“These things are going to drive output over the next three or four months,” said Fiore. “It really touches everything.”