The manufacturing sector continued its expansion, now in its 13th consecutive month, in August according to the Institute for Supply Management™ in the latest Manufacturing ISM Report on Business®. The purchase managers index rose to 56.3 percent in August, up from 55.5 percent in July. A reading above 50 percent generally indicates expansion.
Of the 18 manufacturing industries covered by the report, 11 reported growth in August, 5 reported contraction in the month and 2 indicated no change in conditions.
New Orders
The pace of growth in new orders declined in August. The New Orders Index registered 53.1 percent, which is a 0.4 percent drop compared to the 53.5 percent reading in July.
Employment
The Employment Index jumped 1.8 percentage points month-over-month to a strong 60.4 percent. Ten of the 18 industries reported growth in employment. However, one must consider that the manufacturing sector of the U.S. is rather small compared to the services sector. While the employment index is encouraging, financial markets may be overreacting to the ultimate impact of this number on the overall economy and unemployment situation. We will revisit this when the services sector survey for August is released.
Inventories
The Inventories Index grew 1.2 percent month-over-month in August, registering a modest 51.4 percent. Eight of the 18 industries reported increases in inventories.
Customers’ Inventories
Survey respondents continue to believe that their customers’ inventories are too low. The Customers’ Inventories Index registered 43.5 percent in August, up from 39 in July.
Prices
Price pressures may be starting to show up in the supply chain. Twelve of the industries reported paying increased prices in August as the Prices Index hit 61.5 percent, a four percent jump from July. While 35 percent of respondents reported paying higher prices and 12 percent reported paying lower prices, 53 percent of supply executives reported paying the same prices as in July.
Order Backlogs
The Backlog of Orders Index registered 51.5 percent in August, down from 54.5 percent in July. Eight of the 18 industries reported increased order backlogs in August, while seven reported order backlog decreases.
Overall, the report is consistent with a view that, while the pace of growth in the economy is slowing, the expansion continues. Rising prices are a concern to the extent they cannot be passed on to end users, thus impacting profit margins.
One curious piece of information in the report was a note that copper prices are rising, yet steel prices are decreasing. Without looking at the price charts for these two commodities to check whether this is a market phenomenon (meaning the price is adjusting to an overbought or oversold condition due to speculative trading in the metals), it is curious as to why the prices of two important commodities in manufacturing would be heading in different directions. The only commodity listed in short-supply is capacitors, so higher copper prices are not likely due to a supply issue. Perhaps steel is in oversupply. Hard to tell what the answer is, but this phenomenon does raise many questions.
For more on the ISM Manufacturing Survey, please click on the “Economic Growth Statistics” page on the menu bar above or in the Pages list in the left-side column, then scroll down towards the bottom of the page.
Gregg D. Killoren
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