January 5, 2021 Reading Time: 3 minutes

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index posted a gain in December, registering a 60.7 percent reading for the month, up from 57.5 percent in November. The latest result is the seventh consecutive reading above the neutral 50 threshold (see top of first chart). Over the past seven months, the Purchasing Managers’ index has averaged 56.5, the highest since March 2019. Overall, the report notes, “The manufacturing economy continued its recovery in December. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are causing strains that are limiting manufacturing growth potential. However, panel sentiment remains optimistic (three positive comments for every cautious comment), an improvement compared to November.”

Among the key components, the New Orders Index came in at 67.9 percent, up 2.8 percentage points from 65.1 percent in November (see top of first chart). The New Orders Index has been above 50 for seven consecutive months and above 60 for six consecutive months. The seven-month average is 63.8, the highest since May 2018. Thirteen of eighteen industries in the survey reported growth in new orders in December.

The New Export Orders Index came in at 57.5 percent in December, down 0.3 percentage points from a 57.8 percent result in November. The Backlog-of-Orders Index came in at 59.1 percent in December, up from 56.9 percent in the prior month and the highest level since June 2018 (see second chart).

The Production Index registered a 64.8 percent result in December, up from 60.8 percent in November. The index has been above 50 for seven consecutive months and above 60 for the last six months (see bottom of first chart). The seven-month average is 61.8, the highest since June 2018. Thirteen industries reported growth in the latest month.

The Employment Index rose in December, adding 3.1 percentage points to 51.5 percent in December, versus 48.4 percent in November. The employment index remains one of the weaker components, posting just two months above the neutral 50 mark over the past 18 months (see bottom of first chart). The Bureau of Labor Statistics’ Employment Situation report for December is due out on Friday, January 8th. Consensus expectations are for a gain of 100,000 nonfarm-payroll jobs including the addition of 20,000 jobs in manufacturing. The unemployment rate is expected to hold steady at 6.7 percent.

The Supplier Deliveries Index, a measure of delivery times from suppliers to manufacturers, jumped to 67.6 percent from 61.7 percent in November. Slower supplier deliveries are usually consistent with stronger manufacturing activity. According to the report, “Suppliers continue to struggle to deliver, with deliveries slowing at a faster rate compared to November. Transportation challenges and challenges in supplier-labor markets are still constraining production growth — and to a greater extent compared to the previous month. The Supplier Deliveries Index reflects the difficulties suppliers continue to experience due to Covid-19 impacts. Supplier labor and transportation constraints are not expected to diminish in the near-to-moderate term due to Covid-19.” The Prices Index rose to 77.6 percent in December from 65.4 percent in November and the highest reading since May 2018. All 18 industries paid higher prices for raw materials in December.

Customer inventories in December are still considered too low, with the index remaining below 50 at 37.9 percent versus 36.3 percent in the prior month (index results below 50 indicate customers’ inventories are too low; see second chart). The index has been below 50 for 51 consecutive months. Insufficient inventory may be a positive sign for future production.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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