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Purchasing Managers Index — Nonmanufacturing

December 5, 2017

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index fell 0.8 point in November to 61.4 after having risen 0.9 point in October.   In October, 16 of 17 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a slightly slower pace than in October.  At its November level the non-manufacturing index equates to GDP growth of 3.3%.

The orders component  declined 4.1 points in November to 58.7 after edging lower by 0.2 point in October.  Orders continued to flow in at a rapid rate in November.

The ISM non-manufacturing index for employment fell 2.2 points in November to 55.3 after having risen 0.7 point in October.   Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 170 thousand per month.

Finally,  the price component fell 2.0 points in November after having declined 3.6 points in October.   That is the sixth consecutive monthly increase.  The price run up in September probably reflect the interruption of the supply chain in that month from the hurricanes.  However, even apart from the hurricanes it is clear that non-manufacturing firms are encountering higher prices for their materials.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Manager’s Index

December 1, 2017

The Institute for Supply Management’s index of conditions in the manufacturing sector declined 0.5 point in November to 58.2 after having fallen 2.1 points in October.  The September level of the index of 60.8 was the highest level for this index in more than thirteen years (May 2004).  Clearly manufacturing activity is recovering.  Some of the strength in September, October, and November reflects the impact of Hurricanes Harvey and Irma  as the re-building effort gets underway.  If the PMI for November  is annualized it corresponds to a 4.5% increase in GDP growth.  If one uses the January through November average PMI it would imply a 4.5% increase in GDP growth this year.

It is important to recognize that the overall index is the compilation of a number of different components — production, orders, employment, supplier deliveries, inventories, prices, the backlog of orders, exports, and imports.

The orders component rose 0.6 point in November to 64.0 after having declined by 1.2 points in October.  The recent surge in orders almost certainly reflects the impact of the back-to-back hurricanes as the re-building process gets started.  The February level of 65.1 was the highest level for the orders component in seven years.   The ISM indicates that an orders index above 52.3  is consistent with an increase in the Census Bureau’s series on factory orders.  It is clear that orders have begun to accelerate which will boost factory production in the months ahead.

In addition to orders, the production component rose 2.9 points in November to 63.9 which is the highest level for this index since February 2011.  Thus, the pace of production has begun to climb and given the rise in orders it should gather momentum as we move into the early part of 2018.   A level above 51.4 is consistent with an increase in the Federal Reserve’s industrial production figure.

The employment index fell 0.1 point in November to 59.7 after having declined 0.5 point in October.  The September level of 60.3 was the highest level for this index since  June 2011.  The employment index had been right about at the break-even point of 50.0 for almost a year but has now broken out to the upside in the  past nine months. While the economy is currently cranking out about 180 thousand jobs per month, the factory sector thus far has produced few of them.  The jobs are coming from services and construction.  An ISM employment index above 50.5 is consistent with the Bureau of Labor Statistics data on manufacturing employment.  Hopefully, 2018 should bring some moderate increases in factory jobs.

The backlog of orders was unchanged in November at 55.0 after having declined 3 points in October.  The backlog had been  fairly steady for a long while, but now orders are rising and the backlog has climbed significantly in the past ten months which will encourage still faster production in the months ahead.

The prices paid component declined 3.0 points in November to 65.6 after having fallen 3.0 points in October.  The September level of 71.5 was the highest reading since May 2011.  Prices continue to climb.  Of the 18 industries reporting, 14 were paying increased prices for raw materials in November.  All 18 industries paid higher prices in September.  Clearly, the two hurricanes were a major factor in the price jump.  A price index level above 52.4 is consistent with an increase in the BLS producer prices index for intermediate materials.

We believe that the economy is  expanding at a moderate pace.  We expect GDP growth of 2.6% in 2017 and 2.9% in 2018.  During that period of time the manufacturing sector will once again begin to expand slowly.

Stephen Slifer

NumberNomics

Charleston, SC