The January Purchasers Manager’s Index fell-back 0.6 point month on month, (m/m) to 59.1, lower than December’s revised 59.7, but still topping analysts’ expectations. The index has been greater than 50, (>50 = expansion) for 17 consecutive months. The new orders sub-index scored a 64.5, its eighth month in a row over 60. Conditions are favorable for the index to record further gains as we head 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 59.0, up 8.1%, 3 months year on year (y/y). When examined on a 12MMA y/y comparison, the index increased by 10.9% y/y. For the 12 months ending January 2018, the composite index averaged 57.8, its best performance since 2004.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score of for January 59.1 was 1.3 points higher than its year to date average, one year ago the composite index was 56.0.
Breaking down the sub-indexes for the monthly numbers: Inventory, (not seasonally adjusted) sub-index moved-up 3.8 points m/m to 52.3 in January. Suppliers felt that their finished goods inventories were too low, while raw material inventories were about right. 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 fell 0.7 points to 64.5. An index above 51.4, is consistent with an increase in the Federal Reserve Board’s industrial production figures. Eleven industries reported growth in production during January. Machinery was the only industry related to the metals industry among the group showing production increase m/m.
The supplier deliveries index increased almost 2 points to 59.1, indicating slower deliveries in January. The employment index fell 3.9 points to 54.2. Seven of the 18 industries reported growth in employment levels during January, while six recorded a decline.
The prices paid sub-index was up 4.4 points m/m to 72.7. The large increase is primarily due the rise in energy prices. Commodities moving up in price included; aluminum, copper and crude oil. Steel was not noted in this month’s release, but spot prices have been on the rise. This will likely be reflected in next month’s ISM report.
New export orders rose from 57.6 to 59.8, as new import orders rose from 54.9 to 56.2. The difference between new export and import orders indicates that trade has had a positive impact on growth thus far in Q1. New export orders have been increasing for almost two years, posting the best performance since 2011.
Momentum (3 month y/y value minus the 12 month y/y value), was negative in eight of the nine categories that we monitor. The composite index momentum was -2.8%. Production momentum was off -2.4%. New orders momentum was down 0.3% after a strong 4.3% rise in December. The employment sub-index momentum recorded a -5.8%. Import momentum was +2.7% as export momentum fell 3.1%. Inventory momentum was -3.8% and backlog momentum declined 2.7%.
Moody’s reports that the depreciating U.S. dollar has a positive impact on manufacturing and therefore on GDP. In its analysis, Moody’s assumed the nominal and real trade weighted dollar stabilize at their current value for the balance of the year. Its model showed that this would add 0.4 percentage points to GDP this year and raise the year on year core personal consumption expenditures (PCE) deflator in the fourth quarter by 0.1 percentage point.
Manufacturing is off to a good start in 2018, despite the pullback m/m on the overall index and the negative momentum on the sub-indexes, the ISM manufacturing report continues to be encouraging.
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.