Logistics and manufacturing: ISM report shows slow but steady economic improvement

PMI up to 44.8% in June; Inventories trending down.

Sean A. Murphy, Logistics Management -- Modern Materials Handling, 7/2/2009

According to the Institute for Supply Management (ISM), the economy is slowly improving, and it likely will continue to grow, based on its latest industry report. 

Norbert Ore, chairman of ISM’s manufacturing business survey committee, says many economic indicators are still below 50 on the 0-100 scale, meaning they are technically “contracting,” but there are signs of steady improvement. Ore says June marked the second month in a row that “the overall economy has experienced some slight growth.” 

For example, seven out of 18 industries—petroleum and coal products; printing and related support activities; wood products; nonmetallic mineral products; miscellaneous manufacturing; chemical products; and primary metals—reported growth in June. 

In addition, the Purchasing Managers Index (PMI) rose 2 percentage points to 44.8% in June, according to the report. Production and prices both rose sharpest of all, by 6.5 points each. Even employment, which traditionally lags behind everything else, rose 6.4 percentage points to 40.7%. 

“The worst of the worst is over,” Ore says. “Everything is moving in the right direction.” 

Ore also noted good news in inventories. Raw materials inventories continued to drop, this time by 2.1 percentage points to 30.8%, while customers’ finished goods inventories also went down, by 2.5 points, to 43.5%. 

Dropping inventories has been one of the first and strongest signs of recovery, as it shows companies are depleting their inventories by making and selling products, which leads to new orders. 

“It indicates a very strong liquidation still taking place,” he says. 

Within a few months, both categories will likely level off in the upper 40s Ore says, but not before these drops give the economy a shot in the arm. 

“The de-stocking phase is just about over,” he says. 

Earlier this year, Ore and ISM predicted the economy would be showing strong signs of recovery, yet still have a long way to go, in the third or fourth quarters this year. These predictions, Ore says, are still on track. In the next few months, Ore says he will be watching to see if the employee and inventory indices continue to rise, and that new orders and production indices stay above 50. 

All of those conditions will add up to an improving economy, and Ore believes that will keep happening. “I think those trends are fairly deeply embedded,” he says.