ISM August manufacturing report is down slightly from July

While manufacturing may be experiencing a bit of a slowdown, the overall numbers in the August edition of the Institute for Supply Management’s Manufacturing (ISM) Report on Business still point to growth.

For August, the ISM reported that the index it uses to measure the manufacturing sector—known as the PMI—was 50.6 percent, down 0.3 percent from July’s 50.9 and also down from June’s 55.3. As reported by LM, earlier in the year, the PMI was routinely topping 60 but experts said it was not likely it would remain at that level for a long period. From January through April the cumulative PMI average was 61.0 percent for the best combined four-month stretch in this report in more than 20 years.

According to the ISM, any reading 50 or higher is a sign of economic growth. But even with sequential declines in three of the last four months, August marks the 25th consecutive month economic activity in the manufacturing sector has expanded, with the overall economy showing growth for the 27th straight month.

Among the key metrics in the report, New Orders were up 0.4 percent at 49.6, and Production slipped 3.7 percent to 48.6. Employment inched down 1.7 percent to 51.8.

“We are still in the growth category,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “It is quite amazing for most people to see this; a lot of forecasters were predicting contraction, and we beat that estimate, which is a tribute to the broad manufacturing sector that has maintained its resolve during tough times.”

But even though growth is still occurring Holcomb did not mask the fact that there are also some weaknesses that are starting to emerge.

Some of these signs of weakness include New Orders, which were up 0.4 percent to 49.6, and contracted for the second straight month, and Backlog of Orders, up 1.0 percent to 46.0 and contracting for the last three months.

“This [backlog of orders] shows that companies are using their production capacity to chew up backlog, but it is now also impacting production for the first time in about 26 months,” he said. “We are fortunate that the PMI is in positive territory and being kind of held up by Employment and inventories.

Coming off of a three month stretch from May-July, which saw prices sink a cumulative 26.5 percent, Prices in August fell another 3.5 percent to 55.5.

And with a 30 percent drop in prices going back to April, it is clear manufacturers are seeing some relief. This could mean that good things are ahead for manufacturers, especially if the economy shows some real signs of a recovery.

“It is likely to be a few more months before buying trends head up again and continues the momentum we saw earlier in the year,” said Holcomb.

Inventories were up 3.0 percent at 52.3, and Customers’ Inventories were up 2.5 percent at 46.5.

Manufacturers, said Holcomb, are doing a very good job of tuning inventories to the realities of new orders and production and keep activity hovering around the 50 percent mark, which shows good inventory control.

“Customer inventories, while slower growing, show that there is still some appetite and some pull potential for customers, but it could be the new normal to be under 50,” he said. “It is inching up in the wrong direction but still well under 50. For raw materials inventory at 52.3, it is still a little hard to tell what is going on for a one-month basis. When things are going well sometimes manufacturers will ensure they have more inventory so they don’t run out and are able to fill orders. But there can be situations where new orders and production slow down and they are holding inventories, which shows disciplined inventory control.”

While the U.S. remains in positive territory for manufacturing growth, various reports are showing that is not the case in other parts of the world, especially in European and Asia Pacific nations.

Holcomb said that what is happening in the U.S. runs counter to many other global regions and is surprising many economists. What’s more, the situation in the U.S. shows that the nation is broad and deep at a time when some sectors are growing more than others.

“It is a tribute to U.S. manufacturing being long-standing and robust relative to world economies,” said Holcomb.