Manufacturing finishes 2017 with strong momentum, reports ISM

The Institute for Supply Management (ISM) reported this week that manufacturing finished 2017 in solid shape.

The report's key metric, known as the PMI, was 59.7 (a reading of 50 or higher indicates growth) in December, which was 1.5% ahead of November's 58.2. This marks the 16th straight month that the PMI has grown, with the overall economy growing for the 103rd consecutive month. The December PMI is 2.1% ahead of the 12-month average of 57.6.

Growth was intact for most of the report's key metrics. New orders, which are commonly known as the engine that drives manufacturing, saw a 5.4% gain to 69.4, while growing for the 16th straight month. ISM said this stands as its highest reading going back to January 2004's 70.6, with 15 of 18 manufacturing sectors reporting growth in December.

Production headed up 1.9% to 65.8 for its highest reading since hitting 66.5 in May 2010 while growing for the 16th straight month. Employment dipped 2.7% to 57.0 but still showed growth, albeit at a slower rate, for the 15th straight month.

ISM said that 16 of the 18 manufacturing industries reported growth in December, including: Machinery; Computer & Electronic Products; Paper Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Primary Metals; Nonmetallic Mineral Products; Petroleum & Coal Products; Plastics & Rubber Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Furniture & Related Products; Transportation Equipment; Chemical Products; Fabricated Metal Products; and Electrical Equipment, Appliances & Components. Two industries reported contraction during the period: Wood Products; and Textile Mills.

Comments from ISM member respondents included in the report were largely positive. A chemical products respondent cited its business moving higher into the New Year, with increased sales resulting in increased capital expenditures and raw materials purchases. And a computer and electronic products respondent pointed to a ramp-up, with companies releasing early 2018 spend now.

“The PMI hit the second highest level we have seen since February 2011, and the only higher number was the hurricane number, which was largely driven by supplier deliveries,” said Tim Fiore, chair of the ISM's Manufacturing Business Survey Committee. “This is probably the purest and cleanest PMI we have seen in a long time. It was led by the new orders number, which hit a 14-year high, coupled with customer inventories (down 3.5% to 42.0) and backlog of orders (up 1.0% to 56.0) gaining, that means we are still not able to keep up with demand from a production standpoint.”

Other things factoring into a strong December, according to Fiore, was the end-of-the-year effect, with many companies closing on a calendar or fiscal basis, as well as working to meet their cash numbers, and setting budgets for 2018. And with an increased flurry of new orders, he said that indicates manufacturers are optimistic they will beat their plans but do not want to beat them by too wide of a margin and are confident in order streams for the first quarter.

Supplier deliveries in December came in at 57.9 (above 50 indicates contraction), which was 1.4% ahead of November and showed slowness for the 20th month in a row.

“This is a good number, because it shows suppliers are struggling and you want them to struggle,” explained Fiore. “You would never expect to see high production and new orders numbers with a supplier delivery number at 50; it is probably never going to happen.”

December prices remained very strong, rising 3.5% to 69 and growing for the 22nd straight month.

This was paced by manufacturers going to suppliers in the August-October timeframe for price proposals for the next year to get baked into their business plan and then get management approval, followed by orders being placed in November and December for delivery in the first quarter, explained Fiore.

“At that point, they start realizing a price growth at least from a commitment standpoint….which had something to do with the December reading and the orders and commitments reflecting higher prices,” he noted. “The other thing that could be happening is that as people scurry to close the year and set budgets, there may be some expediting charges in there and may have agreed to pay a little more to get deliveries a little bit earlier.”

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