ISM Manufacturing New-Orders Index Hits Highest Level Since 2004

Wednesday, January 3, 2018

The Manufacturing Purchasing Manager’s Index from the Institute for Supply Management registered a 59.7 reading in December, up from 58.2 in November. That is the 16th month in a row above the neutral 50 level and the second-highest reading, behind a 60.8 result in September, since 2011.

For this index, 50 is neutral, with readings above 50 suggesting expansion in manufacturing and readings below 50 suggesting contraction. Typically, the PMI ranges between 45 and 65. Historically, readings above 43.3 suggest expansion for the overall economy. December is the 103rd month in a row above 43.3.

Of the 10 components, 8 had gains in December. Among the key components of the PMI, the new-orders index came in at 69.4, up from 64.0 in November. December was the 16th consecutive month of readings above 50. A new-orders index above 60 is strong by historical measures, and December marks the 7th month in a row, and the 11th month in the past 13, that the index has been above 60. Since 1985, the new-orders index has led the growth in manufacturing output by about five months. The strong results of the ISM new-orders index suggest that growth in manufacturing output is likely to accelerate in coming months (see chart).

The production index was 65.8 in December, the highest result since May 2010. December marks the 16th month in a row above 50 and the 7th such month above 60. Historically, readings above 51.4 are consistent with growth in the industrial-production index from the Fed. In December, 13 of the 14 industries surveyed reported growth while just 1 reported a decrease in production.

The employment index fell to 57.0 in December, down from 59.7 in November. The slightly lower but still favorable reading suggests employment in manufacturing likely increased in December but at a slower pace. According to the ISM semiannual economic forecast report, 65 percent had difficulty hiring new employees and 44 percent increased starting pay to attract new workers.

Supplier deliveries, a measure of delivery times for suppliers to manufacturers, came in at 57.9, up from 56.5 in November. It suggests suppliers are falling farther behind in delivering supplies to manufacturers. Furthermore, backlogs of orders rose 1 percentage point to 56.0 in December from 55.0 in November while customer inventories contracted at a faster rate, with the index falling to 42.0 from 45.5 in the prior month. Among manufacturers’ customers, only one reported excessive inventories, furniture, and related products. The remaining 13 industries reported customer inventories as too low.

The one component that raises some concern is the price index. The price index rose 3.5 percentage points to 69.0 in December from 65.5 in November. The index has been trending higher for the past two years, and has been above 60 for 6 consecutive months and 12 of the past 13 months. This result suggests manufacturers are experiencing materials-costs pressures.

Today’s report from the ISM suggests the manufacturing sector continued to grow in December. Strong readings for new orders, production, and backlogs are particularly favorable, suggesting a positive outlook for manufacturing. Those results are in line with other data recently that point to ongoing expansion for the overall economy.

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Robert 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.