On January 3, the Manufacturing Institute for Supply Management (ISM) released its latest Report on Business, a monthly publication that provides industry trends and statistics for the manufacturing sector. The referenced Purchasing Managers Index (PMI) below is a composite index for the manufacturing industry compiled by the ISM, and is based on five subcategories: new orders, production, employment, supplier deliveries, and inventories. A PMI index over 50% indicates that the manufacturing environment is expanding, and the ISM uses this information to analyze the state of the economy and predict future growth or contraction. See below for the PMI for each month in 2019:
Average for 12 months – 51.8
High – 56.6
Low – 47.2
Although the economy grew for the 128th straight month, manufacturing saw the ninth consecutive month of contraction, with December indicating the fastest rate of contraction since June 2009. During the panel discussion held with ISM and representatives from manufacturing industries, one of the hottest topics continues to be concerns over global trade. Representatives from the Food, Beverage & Tobacco Products industry noted that some suppliers are passing along tariff-related costs.
Consumption, which is measured by production and employment, contracted during December 2019. Production decreased 4.1% from September 2019 to December 2019 and only three of the 18 manufacturing industries experienced growth: Food, Beverage & Tobacco Products, Machinery, and Miscellaneous Manufacturing. ISM’s Employment index came in at 45.15%. To put this into perspective, an Employment index over 50.8% is comparable to an increase in Bureau of Labor Statistics data on manufacturing employment.
However, there is a positive side to this decrease in consumption. A decrease in New Orders and Customer Inventories, in conjunction with a growing economy, may indicate increased demand in Q1 2020. New Orders came in at 46.8%, decreasing 0.5% from September 2019 to December 2019. Representatives from the Chemical Products industry indicated that they provided customers with sales promotions in an attempt to stimulate sales in Q4 2019. Customer Inventories were too low for the 39th consecutive month, with an index of only 41.1% at December 2019.
Inputs, which includes Inventories, Imports, and Supplier Deliveries, saw improvement. Inventories came in at 46.5%. An index of 44.3% is consistent with expansion in the data provided by the Bureau of Economic Analysis. Supplier Deliveries, with an index of 54.6% in December 2019, increased 3.5% from September 2019 to December 2019. Finally, Imports came in at 48.8%. This was primarily in an effort to obtain the necessary materials before production slowdowns caused by the Lunar New Year season in Asia.
Although Prices are not included in either consumption or inputs, it is worthwhile to look at due to its relationship with Supplier Deliveries. With an index of 51.7%, Prices saw an increase of 2% from September 2019 to December 2019. Specifically, copper, steel, and aluminum experienced growth in price. The increase in Supplier Deliveries, coupled with an increase in prices, is another positive indicator for the manufacturing industry in Q1 2020.
Unfortunately, manufacturing does not yet have 20/20 vision on how the coming year will go. Nonetheless, continued growth of the economy as a whole and the various factors noted above, may indicate a stronger Q1 2020 than Q4 2019.
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