After 10 consecutive months of expansion, economic activity in the manufacturing sector hit the ceiling in December, according to the latest Manufacturing ISM Report on Business. The report, issued by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, also indicates the overall economy grew for the 74th consecutive month. Add to that his projection that GDP will grow in the coming months, and there's reason to be cautiously optimistic. There's enough of a downside for pessimists to appreciate as well.

“We'll probably get a GDP in the 2% to 2.5% growth rate in 2008,” he says. “The problem from a manufacturing standpoint is at 2% in overall GDP growth, manufacturing is pretty much stagnant. Growth has to be above 2% for manufacturing to grow.”

Seven industries did report growth in December: apparel, leather and allied products; petroleum and coal products; food, beverage and tobacco products; computer and electronic products; machinery; primary metals; and miscellaneous manufacturing.

One respondent's comments summarized the core problem: “Business is good, but higher raw material prices are squeezing margins,” this manager from the primary metals market says.

The big question is: What will happen to inventories? Ore notes that in October the Federal Reserve said the customer inventories index was starting to show signs of too much inventory in the supply chains, and it was one of the reasons for an interest rate cut.

“Inventory managers have to decide if their sales forecast is realistic for the inventory levels they're trying to maintain,” Ore says. “I always look at the short supply list. If there's nothing on it, you have no reason to run a large inventory. You have to balance availability against the probability for the economy for 2008.”

Is the economy near a recession? Ore says no, noting that although the December purchasing manager's index (PMI) registered 48.4% (a decrease of 1.6 points when compared to November's 50.0%), ISM's data would have to be below 50 for six consecutive months to qualify as a manufacturing recession.

“Global demand will keep us from an overall recession,” he concludes. “We have Fed rate cuts coming in the spring, and when the Fed cuts rates, it takes about six to nine months to get through the economy. We still have a weak dollar which is in favor of U.S. manufacturers.”