Logistics business: ISM PMI bodes well for overall economic outlook

The economic recovery took what could be viewed as a strong step forward based on the Institute of Supply Management’s (ISM) most recent monthly manufacturing report.

The index the ISM uses to measure the sector, or PMI, came in at 60.4% in April. Any reading that is 50 or better represents economic growth. And April represents the ninth consecutive month that the PMI has eclipsed 50, while adding that the overall economy has been on a growth track for 12 straight months. On an annual basis, it is significantly higher than the 40.4% PMI from April 2009.

According to Norbert J. Ore, the chair of the ISM’s Manufacturing Business Survey Committee, April’s growth rate is the fastest since June 2004’s PMI of 60.5%. Ore noted in a statement that New Orders for manufacturers remain strong, with the New Orders Index averaging out at 61.6%, coupled with the ISM’s Employment Index growing for the fifth straight month.

“Overall, the recovery in manufacturing continues quite strong, and the signs are positive for continued growth,” stated Ore.

What’s more, the ISM reported that 17 of the 18 manufacturing industries reported monthly growth for the second straight month.

In an interview with Modern, Ore explained that this shows the manufacturing base has broadened and more companies are benefitting from the economic recovery.

“Before only 10 or 12 industries were showing growth,” said Ore. “Now, the recovery appears to be going in more directions.

The continuing uptick in New Orders also bodes well for continued economic growth, noted Ore. For the last 10 months, New Orders have been averaging 61.5%, and this shows the “depth and breadth” of the recovery, which Ore said will likely continue through the second quarter and into the third quarter.

Inventories—at 49.4%—were down 5.9% from March. Even though it is below 50%, the ISM notes that an Inventories index exceeding 42.6% is consistent with expansion in the Bureau of Economic Analysis’ figures on overall manufacturing inventories.

Even thought Inventories are down sequentially, Ore said the economy is still growing although the rate at which it is growing is slightly slower. And inventories are continuing to grow through what Ore called a significant de-stocking cycle.

“Going through this de-stocking cycle means that manufacturers may have overshot the mark, which will lead to a re-stock, said Ore. “And when you look at Customers’ Inventories falling 6.0% to 33.0 it says we are still not getting the job done with customers and re-stocking their positions.”

When lowering inventory levels, Ore said one of the ways of doing that is to order stock more often in smaller quantities. And when replacing inventory, the typical strategy, he said, is to order less often and in larger quantities. But it does not always work out that way, as many businesses, instead, will order more often and in larger quantities.

And as a major index for logistics services and freight transportation services providers, Ore pointed out that New Orders subsequently leading to higher Inventories, will mean good things for overall business, as logistics costs typically 5% to 10% of New Orders’ costs.