Manufacturing strength continues in April, says ISM

While consumer spending is dragging somewhat due to increasing fuel prices, manufacturing growth shows no sign of stalling out based on data released today by the Institute for Supply Management (ISM).

The ISM’s April Manufacturing Report on Business reported that the index it uses to measure the manufacturing sector—known as the PMI—was 60.4 percent in April, down 0.8 percent from March.

According to the ISM, any reading 50 or higher represents economic growth, and April is the 23rd consecutive month economic growth has occurred in the overall economy and the 21st consecutive month economic activity in the manufacturing sector has occurred, according to the report.

“The recent trend of rapid growth in the manufacturing sector continued in April as the PMI registered above 60 percent for the fourth consecutive month,” said Norbert J. Ore, CPSM, C.P.M., chair of the ISM Manufacturing Business Survey Committee, in a statement. “The New Orders and Production Indexes continue to drive the PMI, as they have both exceeded 60 percent for five consecutive months. Manufacturing employment appears to have developed significant momentum, as the Employment Index readings for the first four months of 2011 are the highest readings in the last 38 years. Inventory growth also took place in April after two months of destocking; however, the inventory restocking would appear to be necessitated by the strong performance in new orders. While the manufacturing sector is definitely performing above most expectations so far in 2011, manufacturers are experiencing significant cost pressures from commodities and other inputs.”

What’s more, for the first four months of the year, the PMI average is 61.0 percent. In December, Ore said that the PMI average for all of 2010 was 57.3, he did not expect the index to get much higher.

But now with one-third of the year in the books and the PMI seeing continued gains, he said what is now occurring represents a very strong performance on the manufacturing front.

The ISM’s data appears to be in lockstep with recently-released numbers for shipments of manufactured goods and new orders for manufactured goods and durable goods orders from the United States Department of Commerce, which all saw sequential gains from February to March.

“That is the case, but what is really happening here is manufacturing is outperforming the other segments of the economy right now,” said Ore. “There is a big difference in performance between manufacturing and other sectors.”

Ore explained that manufacturing is benefiting from a number of things, including a typical business cycle recovery in which companies, lower inventories and employment, reduce spending, and are more productive. And they are also benefiting from a weaker dollar, too, he said. This is especially notable as 80 percent of the ISM’s survey respondents are active exporters and are getting a boost from the weaker dollar and demand for American-made goods. This is prevalent in certain industries like the chemical, plastics, and transportation industries.

New Orders at 61.7 were down 1.6 percent from March, and Production at 63.8 was down 5.2 percent. Employment at 62.7 was down 0.3 percent. Inventories were up 6.2 percent at 53.6, and Customers’ Inventories at 40.5 were up 1.0 percent. Backlog of orders was up 8.5 percent at 61.0, and Prices at 85.5 percent rose 0.5 percent.

Backlog of Orders increasing, said Ore, reflects how certain sectors like steel and copper and paper can struggle to keep up with demand and also deal with seasonal buying patterns. He added that increases in backlogs typically are not cause for concern unless supplies are running short.

Even though growth is still is occurring, Ore said that the rate of growth could slow down throughout the rest of the year, explaining that with an index like this one, once a peak is reached like it was in February when it hit 61.4 (its highest reading since May 2004), it can be hard to maintain that level. But he said there are still strong indications out of the sector that remain very positive.