Manufacturing is picking-up according to the latest report from the Institute for Supply Management. The Purchasers Manger’s Index posted a score of 58.8, up 2.5 points month on month, (m/m) surpassing analysts’ expectations. The new order sub index was north of 60 for the fourth month in a row. Twelve of 18 industries reported growth in new orders. However, primary metals was one of the four 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 57.3, up 11.4%, 3 months year on year (y/y), and up 10.3% y/y.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score of 58.8 was 1.1 point higher than its year to date average and still solidly in the expansionary zone. One year ago the composite index was 49.4.
The inventory index shot up 5.5 points to 55.5 in August, up 6.1% y/y. 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 4.8 in August. Although weaker than in previous months, still points toward modest improvement in factory production for the coming quarters. Order backlog improved modestly, up 2.5 points m/m to 57.5. The slight difference between new export and import orders imply that trade made had a limited effect on GDP growth early this quarter.
The employment index surged by 4.7 points to 59.9 in August its strongest showing since August 2011. Manufacturing employment climbed by 36,000 in August, 10,000 higher than July’s gain.
Momentum (3 month y/y value minus the 12 month y/y value), was positive in six of the eight categories. The composite index momentum was +1.1%. Production posted momentum of +3.2%. New orders momentum came in at +0.8%. The employment sub-index momentum recorded at sold gain of +4.6%. Import momentum rose 2.1% as export momentum fell 2.6%. Inventory momentum declined 1.0% and backlog momentum posted +0.8%.
Hurricane Harvey will impact industrial production. Energy output will also be affected. These disruptions are anticipated to be temporary in nature and have a minimal impact on Q3 and Q4 GDP. Overall, fundamentals for manufacturing are positive. In addition, the global economy is improving and the U.S. dollar has softened, giving a boost to export oriented manufacturing businesses.
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.