Supply chain business: ISM manufacturing report shows continued growth

Although the numbers are not quite as strong as the previous month, the economic recovery appears to be on solid footing, according the May manufacturing report from the Institute of Supply Management.

The index the ISM uses to measure the sector, or PMI, came in at 59.7 percent in May, down from 60.4 percent in April. Any reading that is 50 or better represents economic growth. May represents the tenth consecutive month that the PMI has eclipsed 50, with the overall economy has been on a growth track for 13 straight months. Annually, it is significantly higher than the 40 percent PMI from May 2009.

Norbert J. Ore, the chair of the ISM’s Manufacturing Business Survey Committee, said in a statement that the rate of growth as indicated by the PMI is driven by the continued strength in new orders and production. New orders matched April’s output at 65.7 percent, and production was nearly even with April, down 0.3 percent at 66.6 percent. Ore added that employment continues to grow, with manufacturers adding to payrolls for six consecutive months. May employment was up 1.3 percent at 59.8.

And the ISM stated that 16 of the 18 manufacturing industries reported growth. Ore said in the past only ten or 12 industries were showing growth, explaining that this shows the recovery may be going in more directions.

"New orders and production were so close to [April] that I would not consider the difference to be anything but noise in the PMI," said Ore. "It really says that April was a very good month, and May was almost in every respect as good as April was. And we are continuing a very strong trend that began when we saw things really picking up earlier in the year."

Inventories—at 45.6 percent—were down 3.8 percent from April. Even though it is below 50 percent, the ISM notes that an Inventories index exceeding 42.6 percent is consistent with expansion in the Bureau of Economic Analysis’ figures on overall manufacturing inventories.

This number inventory growth is still occurring, which Ore said is positive, as long as it is not excessive.

"I always look at the inventory-to-sales ratio…as sales improve, you obviously want to see inventories getting higher also in order to support higher levels of sales," said Ore.

Ore said a way of checking on the overall health of inventories is to take the reading for new orders at 65.7 and subtract the inventories index from that at 45.6, which is 20.1 percentage points higher that orders are growing faster than inventories. This, according to Ore, is very positive and indicates that manufacturing is operating closer to capacity.

But if the difference between new orders and inventories was in the neighborhood of 10 percent, Ore said there would be more concern. But a difference of 20 indicates new orders are very strong, and inventories are trying to catch up.

Even though the ISM PMI has been strong for s sustained period, there are other indices—such as employment growth—that suggest more needs to occur for the economy to truly rebound. When asked what needs to occur for other indices to demonstrate growth, Ore commented that the manufacturing sector represents about 12 percent of GDP on an expenditure basis.

And if the rest of the economy were growing at a similar rate the GDP would be growing at an annual rate of about 6 percent, according to Ore.

"The problem is the services sector, which is significantly [larger] than manufacturing, and the segment of small business, which does overlap with the services sector, are barely growing," said Ore. "The problem is those are the biggest job creators, and until we see those pickup and see significant growth—and we will see it in the services sector for large services sooner than small businesses, which have been hurt terribly."

Ore cites a lack or directed public policy as the reason small businesses are hurting. And the sectors where growth is much smaller (less than 2 percent) are the ones that continue to have the hardest time.

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