The Institute for Supply Management’s manufacturing index for continues to perform well despite a 1.5 point drop to 56.3 in June, which was in-line with analysts’ expectations. The decline stemmed from a 3.1 point drop in new orders to a still very strong 60.4. Fourteen of 18 industries reported growth in new orders to include primary metals and machinery.
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 despite the decline month on month. On a 3 month moving average basis the index posted a value 56.3, up 7.6%, 3 months year on year (y/y), and up 8.4% y/y.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score of 56.3 is right-on its year to date average and still solidly in the expansionary zone. The inventory index moved up 1.0 points to 50.0 in June. ISM reports that an inventory index greater than 42.9 points is consistent with expansion in the Bureau of Economic Analysis’ figures for overall manufacturing inventories. The difference between new orders and inventories which is considered a proxy for future production was 10.4 June. Although weaker than in previous months, still points toward modest improvement in factory production for the coming quarters. The employment index fell 2.0 points to 55.2 in June a bit surprising since other market data indicates a gain of approximately 10,000 in the manufacturing sector. The small spread between new export and import orders indicates that net trade was a small drag on GDP growth this quarter.
Momentum was positive in five of the eight categories. The composite momentum was slightly negative (-0.9%), New orders, -1.8% and Exports -2.0%. Production had positive momentum of 1.2%. The employment sub-index was -2.1%. Import momentum rose 1.4% as inventory and backlog posted fractional gains.
Declining auto production will likely pull down future ISM manufacturing index numbers. Sales are declining and inventories are building forcing producers to extend this year’s outages. Other than autos, manufacturing data continues to hold promise. Global growth is accelerating as the U.S. dollar is depreciating which will help manufacturing.
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.