ISM semiannual report’s ‘special questions’ focus on falling oil prices and strength of U.S. dollar

As the economy moves along, it is never short on key themes and trends that require close attention and analysis in regards to how they fit into the big picture and influence and impact economic activity.

The December 2015 Semiannual Economic Forecast issued yesterday by the Institute for Supply Management (ISM) took on two items that have been prevalent in addressing current trends in the form of: sharply lower oil prices the strength of the U.S. dollar. Each question was presented to the ISM’s manufacturing and non-manufacturing member respondents.

The first question asked ISM member respondents about the net impact to date on their organization’s profits due to the sharply lower prices of oil and related commodities in 2015.
More than 40 percent of manufacturing respondents, at 43.4 percent, said that these lower oil prices have had a positive impact on their organization’s profits, which was followed by 36.0 percent indicating it has had a negligible impact on profits and 13.7 percent citing a negative impact on profits, with 6.9 percent saying they were unsure.

On the non-manufacturing side, there was a mild inverse in comparison to feedback on the manufacturing side, with 43.0 percent saying the sharply lower oil prices had a negligible impact on profits and 37.7 percent pointing to a positive impact on profits. Another 9.3 percent cited a negative impact on profits, with 9.9 percent saying they were unsure.

With nearly 80 percent of manufacturing respondents indicating that lower oil prices did not have a negligible impact on profits Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said that the manifestation of that is in lower raw materials prices on the manufacturing side, which the ISM Semiannual report saw was deflationary, as prices were down 2.9 percent in 2015.

“Those prices were specifically impacted by the price of oil and also by the high price of the dollar overseas, which translates into the cheaper import of raw materials,” he said. “Both of those things have lined up to create deflation in raw materials, and it costs less to run a factory when oil prices are down.”

Like his manufacturing counterpart, Holcomb, Tony Nieves, ISM Non-Manufacturing Survey Business Committee, said that oil prices have a direct effect on operating prices and lower prices have allowed companies to funnel dollars to other areas, at a time when there is not a lot of margin fluctuation.

For the second question, which focused on the strength of the U.S. dollar, the results were largely positive for manufacturing, with 37.9 percent indicating it has had a negligible impact on profits and another 25.3 percent citing a positive profit impact. A little more than one-fifth of manufacturing respondents––21.3 percent–– said that that the strong dollar has had a negative impact on profits, with 15.5 percent saying they were unsure.

“More than 60 percent felt the strong dollar did not have a negative impact on their business despite suspicions otherwise, which confirms how our manufacturing organizations really translate that into real results,” noted Holcomb.

When asked about the impact of the strong dollar on exports, Holcomb said that as evidenced in the ISM’s recent monthly reports exports been down for five or six months, which he said is a negative on balance, but not such a negative that it imbalances the positive takeaways of the report.

56 percent of non-manufacturing respondents said that the strong dollar has had a negligible impact on profits, with another 17.3 percent pointing to it having a positive impact on profits. And 10.7 percent said it had had a negative impact, with another 16.0 percent unsure. 

“With the strength of the dollar you have more latitude in the non-manufacturing sector, because what is exported are services like consulting, technology and some arts, entertainment, recreation, too,” he said. “It is services versus tangible goods [for manufacturing]. Pricing does not weigh in as much compared to something like exporting goods or raw materials.”