Manufacturing: ISM index dips down in September

The Institute of Supply Management reported that manufacturing activity in September was down compared to August.
By Jeff Berman, Group News Editor
October 01, 2010 - MMH Editorial

The Institute of Supply Management reported that manufacturing activity in September was down compared to August. The index the ISM uses to measure the manufacturing sector, or PMI, was 54.4 percent in September, which is down 1.9 percent from a 56.3 reading in August. Any reading that is 50 or better represents economic growth. September represents the 14th consecutive month that the PMI is more than 50, coupled with the overall economy on a growth track for 17 straight months.

“While the headline number shows relative strength this month as the PMI reading of 54.4 percent is still quite positive, the overall picture is less encouraging,” said Norbert J. Ore, chair of the ISM’s Manufacturing Business Survey Committee, in a statement. “The growth of new orders continued to slow, as the index is down significantly from its cyclical high of 65.9 percent (January 2010). Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to weaken further in the fourth quarter. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter.”

Notable readings from the September report include: New Orders at 51.1 (down 2.0 percent from August); Production at 56.5 (down 3.4 percent from August); Employment at 56.5 (down 3.9 percent from August); Inventories at 55.6 (up 4.2 percent from August); Backlog of Orders at 46.5 (down 5.0 percent from August), and Prices at 70.5 (up 9.0 percent from August).

In an interview with Modern, Ore said that by looking at the September PMI reading of 54.4, one may get the impression it was a pretty good month, with manufacturing showing continued growth at a fairly decent rate.

“When you start to dig a little deeper, though, you find that New Orders are softening and Backlog of Orders contracted during the month, so there is not the kind of support for that level of PMI that we like to see out of present and future orders,” said Ore. “What this ultimately means is the overall manufacturing sector has enjoyed overall a fairly robust recovery compared to the rest of the economy.”

But at this point, he said the manufacturing economy has gone through the typical business cycle recovery, which is lower employment and lower inventories, closing excess capacity, working on productivity, and reduced investment. And it has gone through all the benefits of the business cycle recovery and now it is getting into determining what the future is going to look like.

That is where the outlook tends to dim somewhat, as the drivers for manufacturing are consumer spending and business investment, according to Ore, which are both showing significant signs of weakness.

“It is going to be hard for manufacturing to outpace the rest of the economy,” said Ore.

According to ISM data, the average PMI for January through September of 57.4 corresponds to a 5.2 percent increase in real Gross Domestic Product (GDP). And if this average PMI is annualized, ISM said it would reflect a 4.2 percent annual increase in GDP.

And if the economy were in a typical recovery in which the non-manufacturing sector was recovering at a rate close to or slightly behind the same rate as manufacturing, it would resemble healthy GDP growth, said Ore, especially when compared to the 1.7 percent GDP number released by the Department of Commerce earlier this week.

“There is growth, but it is so negligible that it is not going to put a dent in the employment numbers anytime soon,” said Ore.

Inspecting Inventory data: With a 4.2 percent sequential gain from August to September for inventories, Ore explained that the number scares many on Wall Street who look at the New Orders index and subtract inventories from that and are looking for the net difference to show that new orders are growing faster than inventories.

In September, though, the New Orders index at -2.0 growth and Inventories at 4.2 percent growth inverted and crossed the line to where inventories are growing faster than new orders said Ore, which is a concern.

Ore said this means that a closer look needs to be paid attention to the difference between the growth in production and the growth in inventories. Over the last 20 months, production has been feeling the benefit of the recovery and significantly outgrown inventories.



About the Author

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Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff joined the Supply Chain Group in 2005 and leads online and print news operations for these publications. In 2009, Jeff led Logistics Management to the Silver Medal of Folio’s Eddie Awards in the Best B2B Transportation/Travel Website category. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. If you want to contact Jeff with a news tip or idea,
please send an e-mail to .(JavaScript must be enabled to view this email address).


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