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Purchasing Managers Index — Nonmanufacturing

July 5, 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 rose 2.6 points in June to 63.9 after having risen .2 points in May.   In June, 17 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth at a relatively high level.  At its June level the non-manufacturing index equates to GDP growth of 3.7%.

The orders component  jumped 2.7 points in June to 63.2 after having risen 0.5 point in  May.  Orders continued to flow in in June at a solid pace.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment declined 0.5 points in June to 53.6 after having risen a comparable amount in May.   The January level (at 61.6) 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 180 thousand per month.

Finally,  the price component declined 3.6 points in June to 60.7 after having risen 2.5 points in May.   That is the tenth consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.  That will continue to put some upward pressure on the inflation rate.

Stephen Slifer

NumberNomics

Charleston, SC


Purchasing Manager’s Index

July 2, 2018

The Institute for Supply Management’s index of conditions in the manufacturing sector rose 1.5 points in June to 60.2 after having climbed 1.4 points in May.   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 humming.  If the PMI for June is annualized it corresponds to a 5.2% 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 edged lower by 0.2 point to a still very robust level of 63.5.  This series peaked in December at 67.4 which was the highest level for the orders component since January 2004.   Orders continue to climb rapidly which will boost factory production in the months ahead.  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 continued at high levels, with the index at or above 60 percent for the 14th straight month.”

In addition to orders, the production component climbed 0.8 point in June to 62.3 after having jumped 4.3 points in May.  The December level for production at 65.2 was the highest level for production since May 2010.  Thus, the pace of production continues 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 recording the second straight month of expansion growth at 60 percent or above. Labor constraints and, more significantly, supply chain disruptions continue to limit full production potential,”

The employment index fell 0.3 point in June to 56.0 after having risen 2.1 points in May.  The September level of 60.2 was the highest level for this index since  June 2011. It remains fairly  close to that peak level.  The ISM report said the following:  “Employment maintained a modestly strong level of expansion and supported production growth during the month. Respondents noted labor market issues as a constraint to their production and their suppliers’ production capacity,” While the economy is currently cranking out about 190 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 fell 2.5 points in June to 60.1 after having risen 1.5 points in May.   This is the highest level for this series since April 2004, when it registered 66.5 percent.   “Strong backlog, extremely low levels of customer inventory and continued strong new order expansion indicate that production requirements should remain robust into Q3.”

The prices paid component declined 2.7 points in June to 76.8 after having risen 0.2 point in May.  This is the highest reading for prices since April 2011 when it was 85.5.  “The increases in prices across all industry sectors continues.”  While price pressure remains strong, the index saw its first hint of softening since November 2017. 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 3.0% in 2018.  During that period of time the manufacturing sector will continue to expand at a moderate pace.

Stephen Slifer

NumberNomics

Charleston, SC