The February Purchasers Manager’s Index moved up 1.7 points month on month, (m/m) to 60.8, its first time in the “sixties” since 2004. This value was well above consensus expectations and an encouraging sign for the manufacturing sector. The index has been greater than 50, (>50 = expansion) for 18 consecutive months. The new orders sub-index scored a 64.2, its ninth month in a row over 60. Overall, the ISM manufacturing index is strong and fundamentals remain favorable as the global economy strengthens and the U.S. dollar depreciates.
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 59.9, up 6.8%, 3 months year on year (y/y). When examined on a 12MMA y/y comparison, the index increased by 10.0% y/y. For the 12 months ending February 2018, the composite index averaged 58.1, its best performance since 2004.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score for February was 60.8. One year ago the composite index was a still very solid 57.7.
Breaking down the sub-indexes for the monthly numbers: Inventory, (not seasonally adjusted) sub-index moved-up 4.4 points m/m to 56.7 in February. This places inventories at the highest level since March 2010, indicating strong optimism. 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 2.5 points to 62.0. An index above 51.4, is consistent with an increase in the Federal Reserve Board’s industrial production figures. Fourteen industries reported growth in production during February, two noted a decline. The supplier deliveries index increased 2.0 points to 61.1. Slower deliveries indicate a growing constraint on manufacturing production. The employment index surged 5.5 points to 59.7, more than offsetting January’s decline. Further evidence that the job market continues to be strong.
The prices paid sub-index was up 1.5 points m/m to 74.2. The large increase is primarily due the rise in energy prices. Commodities moving up in price included; aluminum, copper, crude oil, diesel fuel and nickel. Steel was not noted in this month’s release, but spot prices have been on the rise. No commodity was listed as being down in price. New export orders rose 3.0 points to 62.8, as new import orders rose 2.1 points to 60.5.
Momentum (3 month y/y value minus the 12 month y/y value), was negative in six of the eight categories that we monitor. The composite index momentum was -3.2%. Production momentum was off -5.7%. New orders momentum was down 5.2%. The employment sub-index momentum recorded a -6.9%. Import momentum was +3.9% as export momentum fell 0.6%. Inventory momentum was +1.3% and backlog momentum declined 4.2%.
Manufacturing is off to a good start in 2018, the ISM manufacturing report continues to be encouraging. Finding suitable labor is becoming an increasingly difficult challenge for employers. Strong capital spending for machinery, aided by tax cuts is anticipated to continue to increase as a result.
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.