The December Purchasers Manager’s Index ended the year on a positive note climbing 1.5 points point month on month, (m/m) to reach 59.7, easily topping analysts’ expectations. The index has now been greater than 50 for 16 consecutive months and 21 of the last 24 months. The new orders sub-index surged 5.4 points m/m to 69.4, its seventh month in a row over 60. Conditions are favorable for the index to record further gains heading into the first quarter of 2018.
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. On a 3 month moving average, (3MMA) basis, the index posted a value 58.9, up 10.7%, 3 months year on year (y/y). When examined on a 12MMA y/y comparison, the index increased by 11.8% y/y. For the 12 months ending December 2017, the composite index averaged 57.6, its best performance since 2004.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score of for December 59.7 was 2.1 points higher than its year to date average, one year ago the composite index was 54.5.
Breaking down the sub-indexes for the monthly numbers: Inventory, (not seasonally adjusted) sub-index moved-up 1.5 points m/m to 48.5 in December. ISM notes 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 production sub-index jumped 1.9 points to 65.8. An index above 51.4, is consistent with an increase in the Federal Reserve Board’s industrial production figures. There were 13 industries that reported growth in production during December. Machinery was the only industry related to the metals industry.
The employment index fell 2.7 points to 57.0. Eleven industries reported growth in production during December while two noted a decline. Unlike in the ISM nonmanufacturing survey, labor was not mentioned as being in short supply. The prices paid sub-index was up 3.5 points m/m to 69.0. Commodities moving up in price included steel, while aluminum was the sole commodity listed as going down in price. New export orders fell from 56.0 to 58.5, as new import orders rose from 54.5 to 57.5. The difference between new export and import orders indicates that trade was a drag on growth in the fourth quarter.
Momentum (3 month y/y value minus the 12 month y/y value), was positive in three of the nine categories that we monitor. The composite index momentum was -1.2%. Production also posted momentum of -1.2%. New orders momentum came in at a strong +4.3%. The employment sub-index momentum recorded a -2.9%. Import momentum was +0.4% as export momentum fell 3.8%. Inventory momentum was -6.4% and backlog momentum was flat.
December’s ISM manufacturing report was generally positive with the promise of continuing strong performance for manufacturing the coming months and quarters.
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.