The Institute of Supply Management’s Index moved up 1.4 points month on month, (m/m) to 58.7 for May 2018. This value is an encouraging sign for the manufacturing sector. The index has been greater than 50, (>50 = expansion) for twenty-one consecutive months. The new orders sub-index scored a 63.7, its twelfth 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.

ism-figure1Figure 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 58.43, up 5.0% 3 months year on year (y/y). When examined on a 12MMA y/y comparison, the index increased by 9.1% y/y.

Table 1ism-table1 breaks down the detail of the composite index and sub-indexes. The composite index score for May was 58.7. One year ago the composite index was a still solid at 54.9.

Breaking down the sub-indexes for the monthly numbers: Inventory, (not seasonally adjusted) sub-index moved-down 2.7 points m/m to 50.2 in May. ISM notes that suppliers were overselling forecast and don’t foresee an end to the upswing in business, finding it difficult to hire skilled and unskilled labor, and seeing an increase in prices due to industry demand.

Of the 18 manufacturing industries, 16 reported growth in May, including Textile Mills; Nonmetallic Mineral Products; Electrical Equipment; Furniture & Related Products. The production sub-index increased by 4.3 points to 61.5. The employment index moved up by 2.1 points to 56.3. Further evidence that the job market continues to be strong.

The Chair of the Institute for Supply Management Anthony Nieves stated that “The majority of respondents are optimistic about business conditions and the overall economy”, and that “There continue to be concerns about the uncertainty surrounding tariffs, trade agreements and the impact on cost of goods sold.” New export orders decreased by 2.1 points to 55.6, as new import orders fell 3.7 points to 57.8.

Manufacturing is off to a good start in 2018, the ISM manufacturing report continues to be encouraging. This month’s results showed a jump in the cost of raw materials, with prices for steel and other materials increasing because of tariffs imposed by the Trump administration.

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.