ISM manufacturing index inches up in August

The Institute of Supply Management reported that manufacturing activity in August was up slightly compared to July.

The index the ISM uses to measure the manufacturing sector, or PMI, was 56.3 percent in August, which is up from 55.5 percent in July. Any reading that is 50 or better represents economic growth. August represents the 13th consecutive month that the PMI is more than 50, coupled with the overall economy on a growth track for 16 straight months.

“Manufacturing activity continued at a very positive rate in August as the PMI rose slightly when compared to July,” said Norbert J. Ore, chair of the ISM’s Manufacturing Business Survey Committee, in a statement. “In terms of month-over-month improvement, the Production and Employment Indexes experienced the greatest gains, while new orders continued to grow but at a slightly slower rate. August represents the 13th consecutive month of growth in U.S. manufacturing.”

Notable readings from the August report include: New Orders at 53.1 (down 0.4 percent from July); Production at 59.9 (up 2.9 percent from July); Employment at 60.4 (up 1.8 percent from July); Inventories at 51.4 (up 1.2 percent from July); and Price at 61.5 (up 4.0 percent from July).

In an interview with LM, Ore said it was somewhat surprising to see an uptick in the August PMI.

“The reality is we have gone through a period where manufacturing has focused on productivity by lowering employment, lowering inventories, reducing investment, and shutting down capacity. Manufacturing was growing at two-to-three times the rate of the rest of the economy. This [PMI reading] is showing some additional strength in the manufacturing sector. We are still looking strong as far as imports and exports are concerned, and automotive is holding up fairly well.”

Holding things back is a stalled out housing market, which would have kept manufacturing at a pace ahead of the rest of the economy, said Ore. But, instead, he said manufacturing is going to slowly look like the rest of the economy in terms of the rate of growth.

But that slowdown may not be around the corner just yet, as 11 of the 18 industries that report into PMI reported growth in August, which is reflective of a manufacturing sector holding up fairly well during a difficult time.

“Some of the strength is coming from inventory replenishment, where companies have been very reluctant to replace inventory and finally decided to take some cash they have built up and put it into some additional inventory, because they think things are going to hold up OK,” said Ore.

Another factor weighing on future manufacturing expansion is the high level of unemployment in the U.S., which has a direct effect on consumer spending levels. And with consumers on the sidelines to such a large extent, a reduction in unemployment is the only thing likely to spur consumer spending.

But the prospects for this coming from manufacturing are dim, said Ore, as an increase in manufacturing jobs is not likely to yield a huge number. Instead, these jobs are going to have to originate from other sectors.

What’s more, the Department of Commerce’s recently revised downward second quarter GDP estimate of 1.6 percent—from 2.4 percent—portends more difficult times may be head.

Ore explained that the August PMI of 56.3 equates to a 4.8 percent GDP.

“If the overall economy is growing at 1.6 percent, that means manufacturing is growing three times faster than the rest of the economy,” he said. “That won’t continue unless the rest of the economy begins to take off. What we will see is manufacturing begin to come down as it won’t continue to outpace the rest of the economy.”