ISM report: Manufacturing index hits lowest level in seven years

Issues in the financial sector, natural disasters and the end of a period of economic growth all contribute to a PMI of only 43.5%.

By Allison Manning, Associate Editor -- Modern Materials Handling, 10/1/2008

This September could be remembered as the beginning of months of bad news in the manufacturing sector, after the PMI hit its lowest level in nearly seven years – 43.5%.

“We’re getting hit from all sides right now,” Norbert J. Ore, Chair of the Institute for Supply Management Business Survey Committee told Modern, noting the issues in the financial sector, the cyclical end to a major global economic growth period as well as hurricanes and other natural disasters. “All of these things hitting at one time is driving the index down to a much lower level.” 

Though the overall economy grew for the 83^rd consecutive month, 43.5% was the lowest level for the PMI since October 2001. After last month’s report, Ore said in the past year, the index has only ranged between a high of 50.7 and low of 48.7. A reading above 50% indicates that the manufacturing economy is generally expanding. Below that indicates it is generally contracting.

Ore said the drastic change indicates the manufacturing slowdown will continue for several months. Consumer, business and government spending is all going to decrease, he predicted, with no short term boosts to the economy coming from consumption. 

“I believe it’s a new trend,” he said, “because of all the negative news that accompanies it.”

While this is the first major reflection of economic distress in the PMI, the trend downward has been showing up in new orders, a leading indicator, for several months. September’s new orders index came in at 38.3%, down 9.5 percentage points from August, and the tenth consecutive month of contraction.

“When [the new orders index] is as weak as it is, it indicates we’ll see a few months of weakness,” Ore said. “It’s typically a two to three month indicator.” 

How far reaching the effects will be beyond that time period is determined partly by the return of confidence to the consumer, he continued, whether that be through a bailout on Wall Street or other measures.

“There’s no guarantee that the consumer will respond no matter what the program is,” Ore said. 

Six industries, in order, reported growth in September:

• Petroleum and coal products
• Paper products
• Food, beverage and tobacco products
• Miscellaneous manufacturing
• Computer and electronic products
• Chemical products

Ore attributed the growth in industries like petroleum and food and beverage to the ability to successfully export. The export orders index, down five percentage points to 52%, indicated growth for the 70^th consecutive month. 

“Those with global supply chains who benefit from a weak dollar have continued to do well,” he said. “New orders index for exports is at 52%. It’s still growing there.”

One fabricated metal products respondent said as business continues to slow, the fourth quarter of 2008 is going to be down 15% from the third quarter. 

After 21 months of growth, the growth in prices was slight, dropping to 53.5%, a 23.5 percentage point difference from August.

“It’s the beginning of a new trend,” Ore said. “The pricing power that companies have enjoyed is going to deteriorate significantly.”