Thursday, 15 of November of 2018

Economics. Explained.  

Category » Purchasing Managers Index

Purchasing Managers Index — Nonmanufacturing

November 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 decline 2.7 points in October to 62.5 after having jumped 4.5 points in September and 4.2 points in August.   While this index declined slightly in October, it fell from the highest level for this index since January 2004.  In October, 17 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth continues at a relatively high level.  At its October level the non-manufacturing index equates to GDP growth of 4.1%.

The orders component fell 0.1 point in October to 61.5 after having risen 1.2 points in September.  Orders continued to flow in at a solid pace in September.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment declined 2.7 points in October to 59.7 after having surged upwards by 5.7 points in September.   The September level of 62.4 was 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 190 thousand per month.

Finally,  the price component declined 2.7 points in October to 61.7 after having risen 1.4 points in September.   That is the thirteenth  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


Charleston, SC

Purchasing Manager’s Index

November 1, 2018

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 2.1 points in October to 57.7 after having fallen 1.5 points in September to 59.8 after having jumped 3.2 points in August.   The August level 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 October is annualized it corresponds to a 4.5% 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 declined 4.4 points in October to 57.4 after having declined 3.3 points in September.  This series peaked in December at 67.4 which was the highest level for the orders component since January 2004.   An orders index above 52.4  is consistent with an increase in the Census Bureau’s series on factory orders.  The ISM noted that “Customer demand expansion softened for the second consecutive month, with the index dropping below 60 percent for the first time since April 2017, when it registered 57.1 percent,”

In addition to orders, the production component fell 4.0 points in October to 59.9 after having risen 0.6 point in September.  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 in the second half of this year.   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 continued in October. Labor constraints throughout the supply chain, impacts due to lead-time expansions and transportation difficulties continue to limit full production potential.”

The employment index fell 2.0 points in September to 56.8 after having increased 0.3 points in September.  The September 2017 level of 60.3 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 continued to expand, supporting production growth. Respondents continued to note labor-market issues as a constraint to their production and, more significantly, their suppliers’ production capability.”  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 rose 0.1 point in October to 55.8 after having fallen 1.8 points in September.   The May level of 63.5 was the highest level for this series since April 2004, when it registered 66.5 percent.  “Backlogs continued to grow, but at slightly lower levels compared to September. Continued low levels of customer inventory and strong new order expansion continue to support production requirements in the near term.”

The prices paid component jumped 4.7 points in October to 71.6 after having fallen 5.2 points in September.  The May level of 79.5 was the highest reading for prices since April 2011 when it was 85.5.   ISM officials noted that “The price increases across all industry sectors continue and at higher expansion levels than the previous month. The Business Survey Committee noted that price increases are continuing to soften in metals (all steels, steel components and aluminum). Increases continue in various basic chemicals, corrugate and packaging products, diesel, natural gas, freight, labor, electrical and electronic components, and products manufactured primarily from steel. Shortages continue in electrical and electronic components, labor, and freight,”  While price pressure remains strong, the index has seen some softening in the past several months.  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 relatively robust pace.  We expect GDP growth 3.0% in 2018 and 2.9% in 2019.  During that period of time the manufacturing sector will continue to expand at a moderate pace.

Stephen Slifer


Charleston, SC