ISM reports strong finish to 2016 manufacturing output

Manufacturing activity finished 2016 with strong momentum, showing growth in December for the fourth straight month, according to the most recent edition of the Institute for Supply Management’s monthly Manufacturing Report on Business.

The PMI, the index used by the ISM to measure growth, came in at 54.7 in December, a 1.3 percent gain over November, as well as turning in the highest PMI reading since December 2014’s 54.9. December’s PMI is the highest over the last 12 months and is 3.2 percent above the 12-month average of 51.5, with the over all economy growing for 91 months in a row.

Each of the report’s core four metrics, including the PMI, showed growth in December.

New orders, which are viewed as the engine driving manufacturing, showed an impressive 7.2 percent gain to 60.2, coming off of November’s modest 0.9 percent increase, while growing for the fourth month in a row and posting its highest reading for 2016. Production headed up 4.3 percent to 60.3 and also grew for the fourth consecutive month, while also posting a new 2016 high. Employment rose 0.8 percent to 53.1, growing for the third month in a row, also hitting its highest level for 2016.

ISM said that of the 18 manufacturing sectors contributing to the report, 11 reported growth in December, including:  Petroleum & Coal Products; Primary Metals; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; Paper Products; Machinery; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Fabricated Metal Products; and Chemical Products. The six industries reporting contraction in December — listed in order — are: Plastics & Rubber Products; Furniture & Related Products; Printing & Related Support Activities; Textile Mills; Nonmetallic Mineral Products; and Transportation Equipment.

Comments submitted by ISM member respondents featured in the report were mainly positive, matching up well with the report’s data takeaways.

A fabricated metal products respondent said that “December 2016 is way ahead of 2015,” and a plastics & rubber products respondent noted that business remains strong and his company is seeing continued growth.

“It was a great finish to the year,” said Brad Holcomb, chair of the ISMs’ Manufacturing Business Survey Committee. “Things have been building off of each other for the last four months. Some of that was driven indirectly by the election cycle, with people eager to get it over with, as well as the stock market doing well. That is driving optimism and could help lead to a horse race economy, rather than a plough horse economy. It is really up to the White House and Congress to keep things moving in an orderly direction.”

When asked about the strong rise in new orders, Holcomb pointed to how 12 sectors reporting growth compared to four sectors citing decreases. Those reporting decreases were smaller sectors, while those growing were comprised of larger sectors like computers and electronics products, petroleum and coal products, and food, beverage, and tobacco products.

And he added it is likely that future new orders readings will see growth, too, with the larger sectors carrying the smaller ones to a degree.

December supplier deliveries were slower, down 2.8 percent to 52.9 (over 50 for this category signals contraction), inventories slipped 2.0 percent to 47.0, backlog of orders were flat at 49.0, and prices jumped 11.0 percent to 65.5.

“The inventory decline reflects how companies try to reduce inventories at year end,” noted Holcomb, “ and it is also about where we have been for the last 18 months, with a more concerted effort to keep inventories low and lean. Customer inventories were are 49.0 in December, which is considered low but also a good number in this case, as it shows tightness in the supply chain and a propensity to generate more new orders to fill the shelves at customer locations.”

As for prices, he noted that prices of raw materials rising so much was significant, in that the timing is unusual because that type of increase is more likely earlier in the year, with contracts being signed for the year ahead, when suppliers meet with customers and sign contracts.

“This is clearly a reflection of something going on in December itself, where somehow suppliers were able to push through price increases for raw materials and customers had to accept it or face the alternative of not getting their products out,” Holcomb said. “Prices need to be watched, because we don’t want to see things get overheated, and the fact that prices have gone up for 10 consecutive months is fine as long as numbers don’t get out of hand.”