Manufacturing slides in August but still showing growth, reports ISM

The dog days of summer have bit into manufacturing data in a sense, even though growth is still intact.

The Institute for Supply Management’s (ISM) August edition of the Manufacturing Report on Business saw its PMI, the ISM’s index to measure growth, fall 1.6 percent to 51.1, following a 0.8 percent decline to 52.7 in July. Even with the relatively slow growth over the last two months, the PI has been at 50 or higher for 31 consecutive months, with the overall economy growing for 75 straight months. The current PMI reading is 2.8 percent the 12-month average of 53.9.

Each of the report’s four key metrics, including the PMI, dropped in August. Following a 2015 high of 56.5 in July, new orders, which are often referred to as the engine driving manufacturing, fell 4.8 percent to 51.7, while still growing for the 33rd straight month, albeit at a slower rate. Production was off 2.4 percent to 53.6 and grew for the 36th month in a row, and employment slowed down by 1.5 percent to 51.2 and grew for the fourth month in a row.

The ISM said that ten of the 18 manufacturing sectors contributing to the report saw growth in August, which was off from 11 in July.

As is often the case, comments submitted to the report by ISM member respondents were mixed. “We are oversold,” stated a paper products respondent. A transportation equipment respondent stated that business is still strong but has slowed slightly. And a computer & electronic products respondent explained that foreign exchange continues to be challenging, especially in Europe, although expectations for the second half of the year remain optimistic as the respondent’s company preps for a new product launch.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, cautioned it would be a mistake to look too deep into the declines seen in the PMI over the last two months.

“During the entire year there has been modest growth,” he said. “The average PMI between January and August was 52.4, and August came in 1.3 percent below that average and has been consistent with the modest growth we have experienced all year. On the bright side, things are still nicely above 50 over all.”

When asked about the nearly 5 percent decline in new orders, Holcomb said that it was unexpected in the sense that it was not expected to fall that much, and he pointed out that they dropped 4.9 percent in January and a hefty 12.1 percent in January 2014.

Inventories fell 1.0 percent to 48.5 in August, and customer inventories rose by 9.0 percent to 53.0.

While the former dropped mildly, Holcomb said they remain in a well-managed zone while adding that customer inventories, or finished goods, are at its highest level since March 2009 and are too elevated and explained how customer inventories saw a rapid drop after its March 2009 peak.

August supplier deliveries slowed at a faster rate, up 1.8 percent to 50.7 (a reading above 50 signals slowing), and backlog of orders headed up 4.0 percent to 46.5.

“Supplier deliveries have been in a faster mode for a little bit and that is attributed to West Coast port operations getting back to normal from that standpoint and topping 50, which is really where it belongs in a growth environment,” said Holcomb. “Suppliers are having a little bit of a hard time keeping up, meaning things are running tight, which, generally speaking, is good news.”

As for backlog of orders, which are contracting but at a slower rate, Holcomb said that things are moving in the right direction. And while a reading of 50 is considered ideal, he stressed that August’s 46.5 is a material improvement over July’s 42.5.

“This means production will have things to work on in the event that new orders do not come in as strongly as we would like,” he said.

Prices saw a 5.0 percent decline at 39.0, falling for the tenth month in a row. The only commodity seeing a decline was plastic products. Metals were all down and due in large part to ongoing declines in petroleum-related products, which is better reflected as energy prices fall, according to Holcomb. Resin and some plastic products, which also were down for some respondents, have a much more direct relation to oil, which makes the declines not surprising, he explained.

Looking ahead to the remainder of 2015, Holcomb said the manufacturing sector is well-positioned to see the PMI remain above 50, while also citing the ISM’s May forecast for a solid 2015, which he said will require a strong fourth quarter performance.

“We are well positioned to have a good finish to the year, but only time will tell,” he said. “The fundamentals of manufacturing in the U.S. are strong. It rolls with the punches thick and thin, yet there is this uncertainty emerging about global markets, Fed action, the stock market rollercoaster, and other things potentially keeping peoples’ dollars in their pockets. That is why I say we need to wait month by month to see what happens. Many people maintain that the fundamentals remain strong.”