Despite slight dip, ISM reports manufacturing is on right track

Even with a slight decline from January, data released today by the Institute for Supply Management (ISM) indicates that manufacturing is on strong footing and still in growth mode.

The ISM reported that the PMI in February, its index used to measure manufacturing activity, was 52.4, which is down from January’s 54.1, which was the highest PMI reading since June 2011. February is the lowest PMI reading since last October’s 51.8, but economic activity in the manufacturing sector has expanded for 31 straight months and overall economic activity has expanded for 33 straight months.

For the report’s key metrics, New Orders was down 2.7 percent at 54.9, and Production was basically flat with a 0.4 percent dip to 55.3. Employment was down 1.1 percent at 53.2. While each of these metrics respectively was down, they were all in the 50’s, pointing to positive growth.

“Even with the decline, the PMI is still comfortably above 50,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “When combining February with January’s PMI reading of 54.1, I think it shows that we are off to a good and sustainable start to the year. Last year we were in or close to the 60s range for PMI for the first four months of the year and that turned out not to be sustainable so I think this is a better situation for us as we begin the New Year.”

While New Orders are commonly referred to as the “engine” which drives manufacturing activity, Holcomb said that the February 54.9 reading is right in line with the 12-month average of 55.2, which he said is a good level, especially when combined with January’s 57.6 which he said may have been a little too high.

And the same goes for Production, he said, with February’s 55.3 in line with the 12-month average of 56.0.

Looking at Employment, Holcomb said jobs numbers are expected to increase as new orders continue to come in, which he said is expected for the foreseeable future.

Prices in February jumped up 6 percentage points to 61.5, whereas a year ago at this time they were well into the 80s range, with 2011 prices up 7-8 percent annually.

“I don’t see that this year; this is more of a moderate level,” said Holcomb. “This is a time of the year when suppliers are negotiating new prices and moderate price increases and this is reflective of that and nothing to be concerned about.”

Supplier Deliveries in February fell 4.6 percent to 49.0, which represents the first time deliveries have been faster than the previous month since May 2009 at 48.9. This indicates that suppliers—at least for now—have caught up in their ability to deliver on time, said Holcomb. He said it is a reflection of companies managing their positions to be “just right.”

Inventories were flat from January at 49.5, which Holcomb said was not a major surprise, given the slight dip in PMI.

“Supplier Deliveries and Inventories do directly factor into the PMI and with both below 50 that keeps the PMI down a little,” said Holcomb. “I suspect Inventories will keep below 50, because it is a cost-reduction focus of companies for managing their capital. The 12-month average for Inventories is 49.8.”

Backlog of Orders was down 0.5 percent to 52.0, and Holcomb said being above 50 is a good level, because it shows growth and is something to draw on in the event that orders soften up, which is not expected at the moment.

The difference between New Orders and Inventories at 5.4 is in positive territory for the fifth straight month, which Holcomb said is a good sign for manufacturing.

“We are seeing consistency and sustainability in manufacturing especially when you combine January and February together,” said Holcomb. “This is a positive and sustainable start for 2012. I see this positive trend continuing.”