ISM reports strong manufacturing growth in December

Keeping in line with its strong momentum in the manufacturing sector gleaned from previous reports, the Institute of Supply Management (ISM) reported that the manufacturing sector remained on a growth path in December.

The ISM’s Manufacturing Report on Business stated that the index the ISM uses to measure the manufacturing sector—also known as the PMI—was 57.0 percent in December, which was 0.4 percent higher than November. Any reading that is 50 or better represents economic growth, and November represents the 17th consecutive month that the PMI is more than 50, along with the fact that the overall economy has been on a growth track for 20 straight months.

“The manufacturing sector continued its growth trend as indicated by this month’s report,” said Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, in a statement. “We saw significant recovery for much of the U.S. manufacturing sector in 2010. The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle. Additionally, manufacturers that export have benefitted from both global demand and the weaker dollar. December’s strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go into the first quarter of 2011.”

Some of the notable PMI readings from the December report include: New Orders at 60.9 percent (up 4.3 percent from November); Production at 60.7 percent (up 5.7 percent from November); Employment at 55.7 percent (down 1.8 percent from November); Inventories at 51.8 percent (down 4.9 percent from November); Backlog of Orders at 47.0 percent (up 1.0 percent from November); and Prices at 72.5 percent (up 3.0 percent from October).

In an interview, Ore said it is encouraging to see 17 straight months of manufacturing growth, and he noted that 2010 will go down as a very good year for manufacturing, with the overall 2010 manufacturing index coming in at 57.3.

“The best thing about the manufacturing outlook right now is that with New Orders above 60 and Production also above 60, it seems to signal that the first quarter of 2011 is going to hold up quite well,” said Ore. “With these levels intact, solid manufacturing growth is sustainable.”

Over the last two months, New Orders and Production have fallen more in line with each other, with a large spread between the two not typical unless something very negative or very positive is taking place, he said. And prior to November, Production was growing significantly faster than New Orders, which was a concern at that time. New Orders typically over time averages 0.3 of a point more than Production, and it usually leads Production, according to Ore.

Looking at inventories, the ISM report noted that Inventories were down nearly 5 percent at 51.8, and Customers; Inventories were off by 5.5 percent in December at 40.0.

Ore said there has been a remarkable period in the last year, where the destocking cycle was quite extended, followed by a significant re-stocking period that has yet to catch up.

“The operative thought process, with Inventories dropping to 51.8 is that there is marginally an increase in December over November but not at the same rate as what occurred in November,” he said. “It tells me inventories are becoming balanced, although we are not there yet. And Customer Inventories falling would indicate we are not there yet in terms of balancing of inventories, but it will start to slow in the first quarter in my opinion and we will see some catch-up. Anecdotally, I am hearing from a number of [shippers] that they still have not caught up on their inventories. They had lowered inventories so significantly and then demand picked up. When they tried to rebuild inventories, demand picked up significantly and they were running the demand more than they were able to catch up on inventory.”