The Institute for Supply Management’s manufacturing index for June increased by 2.9 percentage points month on month (m/m), to 57.8, besting analyst expectations. New orders surged points percentage points 5.3 m/m. This was the second consecutive gain and puts the index back above 60 for the first time since March. Fifteen of the 18 industries that ISM tracks reported growth in new orders. Unfortunately, primary metals was one of the three industries reporting a decline in new orders.
The ISM manufacturing index is based on surveys of 400 purchasing managers in 20 industries. The survey is a diffusion index calculated as a percent of responses. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary,
Figure 1 shows the history of the ISM manufacturing index from 2003 to present. The index is solidly in the expansion region. On a 3 month moving average basis the index posted a value 55.83, up 7.9%, 3 months year on year (y/y), and up 8.0% y/y.
Table 1 breaks down the detail of the composite index and sub-indexes. Momentum was positive in most categories. The exceptions was new orders (-2.3%) and exports (-0.8%). The composite momentum was off a fraction, (-0.1%). Despite the negative momentum all of the sub-index values were well above the 50 threshold for expansion.
The inventory index declined by 2.5 percentage points to 49.0 in June. ISM reports that an inventory index in greater than 42.9 points to growth in the Bureau of Economic Analysis’ figures on overall manufacturing inventories. The difference between new orders and inventories which is considered a proxy for future production strengthened by 14.5 percentage points in June. This points toward improvement in factory production for the coming quarters. The employment index jumped 3.7 points to 57.2 in June, another encouraging result.
The ISM manufacturing index hit it its highest level since August 2014. The sub-indexes within the composite, (headline) were largely upbeat. Of concern going forward is the auto industry which is now in its late cycle expansion. Sales are declining while inventories are on the rise. Still auto production is off just 0.2% on an annualized basis over the past three months. The next couple of months will be telling as summer shutdowns and retooling take place.
At Gerdau we closely monitor the ISM manufacturing index since it is an excellent barometer of the present strength as well as a window on the likely short-run future of US manufacturing.