Thursday, 19 of April of 2018

Economics. Explained.  

Category » Purchasing Managers Index

Purchasing Managers Index — Nonmanufacturing

April 4, 2018

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 declined 2.2 points in March to 60.6 after having risen 3.0 points in February.   In March 15 of 17 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a relatively high level.  At its March level the non-manufacturing index equates to GDP growth of 3.6%.

The orders component  cooled off by declining 5.3 points in March to 59.5 after having climbed 2.1 points in February.  Orders continued to flow in in March although at a slower pace than in February.  February was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment rose 1.6 points in March to 56.6 after having declined 6.6 points in February to 55.0 and having jumped 5.3 points in January.   The January level was by far the highest level thus far in the business cycle.  Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 200 thousand per month.

Finally,  the price component rose 0.5 point in March to 61.5 after having declined 0.9 point in February.   That is the seventh consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.

Stephen Slifer


Charleston, SC

Purchasing Manager’s Index

April 2, 2018

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 1.5 points in March to 59.3 after having risen 1.7 points in February.   The February level of the index of 60.8 was the highest level for this index in fourteen years (May 2004 when it was 61.4).  Clearly manufacturing activity is expanding.  If the PMI for March  is annualized it corresponds to a 4.9% increase in GDP growth.

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 surged declined 2.3 points in March to 61.9 after having fallen 1.2 points in February.  This series peaked in December at 67.4 which was the highest level for the orders component since January 2004.   Despite the modest declines in the early months or this year, orders continue to climb rapidly which will boost factory production in the months ahead.  The ISM indicates that an orders index above 52.4  is consistent with an increase in the Census Bureau’s series on factory orders.  The ISM noted that “New orders expansion continues at a strong pace — slower compared to February’s reading, but still at or above 60 percent for the 11th straight month. Customer Inventories remain too low, and backlog expansion maintained high levels.”

In addition to orders, the production component fell 1.0 point in March to 61.0 after having declined 2.5 points in February.  However, the December level for production at 65.2 was the highest level for production since May 2010.  Thus, the pace of production has begun to climb and given the rise in orders it should gather momentum as we move into the spring.   A level above 51.5 is consistent with an increase in the Federal Reserve’s industrial production figure.  The ISM reported noted that, “Production expansion continues, with the index at 10 straight months over 60 percent. Activity appears to be stabilizing at high rates as the spring/summer selling season approaches. However, labor constraints and supply chain disruptions will continue to prevent or limit maximum production potential.”

The employment index declined 2.4 points in March to 57.3 after having jumped 5.5 points in February.  The September level of 60.2 was the highest level for this index since  June 2011. It remains close to that peak level.  The ISM report said the following:  “Employment expansion remains strong, with many companies struggling to hire skilled workers and indirect personnel to replace natural attrition, and to some extent, an increase in turnover. Many respondents see the labor market as a constraint to production.”   While the economy is currently cranking out about 200 thousand jobs per month, the factory sector thus far accounts for only about 20 thousand of them.  Most of the jobs are coming from services and construction.  An ISM employment index above 50.8 is consistent with the Bureau of Labor Statistics data on manufacturing employment.

The backlog of orders was unchanged in March at 59.8 after having jumped 3.6 points in February.  This is the highest level for this series since April 2011.  The backlog had been  fairly steady for a long while, but now orders are rising and the backlog has climbed significantly in the past year or so which will encourage still faster production in the months ahead.

The prices paid component jumped 3.9 points in March to 78.1 after having risen 1.5 points in February.  This is the highest reading for prices since April 2011.  Raw materials prices continue to climb.  Seventeen of the 18 industries surveyed paid higher prices for raw materials in March than they did in February.   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 2.9% in 2018.  During that period of time the manufacturing sector will continue to expand at a moderate pace.

Stephen Slifer


Charleston, SC