March manufacturing output remains in positive territory, reports ISM

While manufacturing output did not expand materially from February, which marked its highest reading in more than three years, to March, it still remained firmly entrenched in growth mode, according to data issued in today’s Institute for Supply Management’s (ISM) monthly Manufacturing Report on Business.

The March PMI, the index used by the ISM to measure growth, was 57.2 in March (a reading of 50 or higher indicates growth), down 0.5 percent from February’s 57.7, which is the highest PMI reading going back to August 2014’s 57.9. The PMI has now grown for the last seven months and is up 4 percent over the 12-month average of 53.2, with the over all economy growing for 94 consecutive months.

ISM said that 17 of the 18 manufacturing sectors contributing to the report reported growth in February, including: Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Furniture & Related Products; Textile Mills; Machinery; Primary Metals; Miscellaneous Manufacturing; Wood Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Paper Products; Transportation Equipment; Chemical Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; and Petroleum & Coal Products. No industry reported contraction in March compared to February.

Even though the PMI remains in solid shape, some of the core metrics showed sequential declines from February to March.

New orders, which are often viewed as the engine driving manufacturing, dropped 0.6 percent to 64.5 and grew for the seventh consecutive month. This followed a 4.7 percent gain from January to February’s 65.1, matching the previous high of 65.1 recorded in December 2013.

Production saw the sharpest decline, falling 5.3 percent to 57.6 from February’s 62.9, which is its highest level since March 2011 when it was 64.2. And employment saw a 4.7 percent increase to 58.9 and showed growth for the sixth straight month.

Comments submitted by ISM member respondents featured in the report were by and large positive.

A chemical products respondent said business conditions continue to improve, while a computer and electronic products respondent noted that the business outlook is positive. A transportation equipment respondent had a different take, explaining that the industry outlook is currently flat, as well as for 2017, too.

“Even with the decline, the PMI is solid,” said Brad Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. “Otherwise, if things keep rising and rising, the air gets overheated and let out of the balloon. The 57.2 reading is still very strong and is supported by almost all of the industries in the report.”

Addressing the decline in production and the gain in employment in the report, Holcomb said that they work together in that production always uses the available labor and available assets and resources for equipment to level production, with this decline in production potentially pointing to a lack of employees needed at the time in order to keep up.

“There is some evidence that it has been difficult to find certain skilled workers and talent in certain regions,” he said. “That is why you see the employment number going up 4.7 percent and increasing for six consecutive months.”

As a consequence of production not heading up, backlog of orders saw 0.5 percent gain to 57.5 in March, which Holcomb called “a pretty generous backlog” that bodes well for the future.

Keeping in line with recent data trends, inventories fell from February to March, down 2.5 percent to 49.0. Supplier deliveries at 55.9 (over 50 means contraction) slowed at a “faster” rate for the 11th straight month, up 1.1 percent to 55.9, and prices increased 2.5 percent to 70.5, growing for 13 months straight, and its highest level since reaching 76.5 in May 2011.

This reflective of some companies passing along higher prices to consumers, which means that manufacturers need to be cognizant of inflation levels, although it is not a major concern at the moment, noted Holcomb.

On a year-to-date basis, Holcomb said things are at, or better, than what was forecasted in the ISM December Semi Annual report, adding that is it reasonable to expect continued strength going forward.

IHS Markit U.S. Economist Michael Montgomery said current ISM numbers are mostly positive for manufacturing.

“The current manufacturing situation is neither a boom nor a quirk, but a global revival,” he wrote. “This is the world that manufacturers love to see, albeit still in the early stages. After languishing for a few years, the world has suddenly fallen in love with hard goods again, and factories are churning them out all around the globe. Thus, the revival in commodity prices in early 2017. The ISM report’s laundry list of items showing rising prices features commodities and components across a wide spectrum of industries, and explains why the ISM prices reading stands at 70.5 and the supplier deliveries reading stands at 55.9. Neither of those readings signals serious shortages, but taken together they represent the typical growing pains of an uneven expansion. While spring is here on the calendar if not yet in the data, manufacturing’s ongoing solid performance strongly suggests a great second quarter and a solid 2017 calendar year.”