Manufacturing continues to head in right direction, according to ISM

The December edition of Institute for Supply Management’s (ISM) Manufacturing Report on Business pointed to manufacturing growth finishing 2011 on a positive note.

Following a 1.9 percent increase in the November PMI to 52.7, December inched up 1.2 percent to 53.9. The ISM says that any reading 50 or higher is a sign of economic growth. This extends extend the growth streak for economic activity in the manufacturing sector to 29 straight months while the overall economy showed growth for the 31st consecutive month.

Over the last two months, PMI readings each outpaced October, September, and August, which hit 50.8, 51.6, and 50.6, respectively. But even with growth in the manufacturing sector intact, these PMI readings are down compared to the beginning of 2011, specifically the first four months of the year, when PMI was consistently more than 60.

Growth in December was evident in three of the report’s key indicators: New Orders were up 0.9 percent at 57.6, and Production improved by 3.3 percent at 59.9. Employment rose 3.3 percent to 55.1.

“This [report] is a great way to finish off 2011 and a great way to launch 2012 as well,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “Everything is pointing in the right direction, starting with the PMI and the other key metrics. And Pricing (up 2.5 percent to 47.5) below 50 for the third straight month helps a lot, too. There was also good Export (up 1.0 percent to 53.0) and Import (up 5.0 percent to 54.0) growth, too.”

December Inventories dipped 1.2 percent to 47.1 and have remained below 50 for the last three months.

Holcomb explained that this is a reflection of manufacturers intentionally maintaining leaner inventories as a key lever to pull when managing working capital, cash flows and costs overall.

“When Inventories are below 50, it often has the effect of pulling down PMI and the fact that PMI is so positive is really a reflection of the report’s other indices such as Production and New Orders and Employment,” he said.

A year ago at this time marked a four-month stretch from January to April 2011, when the PMI was routinely breaking 60, which was both uncommon and unprecedented.

When asked if that situation could possibly repeat itself, Holcomb said it is unlikely but noted that ISM member companies that are surveyed for this report were more bullish about manufacturing heading into 2011 than they are now in 2012.

“They have learned their lesson…and tempered their view even though it remains quite positive while not over the top positive,” noted Holcomb. “I don’t think we will see PMI in the 60s near term but rather a gradual growth of these indicators.”