ISM manufacturing data is up, but still not back to growth

While still not officially back into growth mode in contracting for the fifth straight month, manufacturing activity showed signs of a bounce back in February, according to the Institute for Supply Management (ISM).

In its Manufacturing Report on Business, ISM said that the PMI, its index to measure growth, was 49.5 in February (a reading of 50 or higher indicates growth), topping January by 1.3 percent and sub-50 for the fifth month in a row, going back to October’s 49.4. October marked the first month that the PMI was below 50 since November 2012. The current PMI is 1.0 percent below the 12-month average of 50.5. Even though the PMI was again down, ISM noted the over all economy has seen growth for 81 months in a row.

None of the report’s four key metrics, including the PMI, declined in February. New orders, which are often cited as the engine that drives manufacturing, were flat, and production saw a 2.6 percent gain to 52.8 in growing for the second straight month. Employment rose 2.6 percent to 48.5 in contracting for the third month in a row albeit at a slower rate than in January.

ISM said that of the 18 manufacturing sectors contributing to the report, nine reported growth in February, including Textile Mills; Wood Products; Furniture & Related Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Chemical Products; Primary Metals; and Paper Products.

The majority of comments submitted to the report by ISM member respondents were more positive than negative, with the comments tending to reflect business attitude and confidence, as well as being forward looking.

A petroleum and coal products respondent said that low oil prices and reduced activity continue to affect business, and a chemical products respondent said that U.S. business demand is up solid, and international demand is soft. A wood products respondent noted that the market is beginning to trend up with spring season on its way. A furniture and related products respondent said that orders are coming in stronger than expected.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said in an interview said that while new orders were flat, the fact that it is still showing growth is good for the manufacturing sector, adding that 12 of 18 manufacturing sectors said new orders were growing, with only four reporting a decrease and is an improvement compared to January.

“Nobody is hitting the panic button over this decline,” he said. “As I look at the numbers, comments, and curves over several years, I see these patterns develop and emerge. And even post recession, when we dropped below 50 in 2012 for a few months, it then sprang back up and grew nicely. We are now below 50 for the last five months, but we are in that same mode of looking back up north and approaching 50, so if history repeats itself we could see the PMI above 50 in the near future.”

Backlog of orders headed up 5.5 percent in February to 48.5 while still showing contraction for the ninth straight month and contracting at a slower rate. Supplier deliveries were up, dropping 0.3 percent to 49.7 (a reading below 50 indicates faster deliveries).

Inventories increased 1.5 percent to 45.0 while contracting for the eighth month in a row, and customer inventories were off 4.5 percent to 47.0, with Holcomb saying that 47.0 percent tally is in a good place, as it indicates this inventory level is too low and there is a need for products to be reordered to fill shelves.

High inventories have been an issue in nearly all facets of the economy. Holcomb explained that things appear to be working themselves out, though.

“Inventories have been contracting for eight consecutive months,” he said. “Heading into last December that was a clear strategy. Now we are two months into 2016, and it is still low, which represents some conservatism in carrying lean inventories. The difference between the 51.5 in new orders and 45.0 in inventories is 6.5, which is good and it suggest we don’t have enough inventory to sustain this level of new orders and production and is likely to go up.”

The inventory figure represents 20 percent of the PMI, and if it was at 50 Holcomb said the PMI would be north of 50, explaining that is the one indicator keeping it down, which is not a bad thing. He noted it is better to see that inventory figure lower than new orders keeping the PMI down.

Prices in February saw a 5.0 percent gain to 38.5, while still decreasing at a slower rate for the 16th month in a row.