Thursday, 24 of May of 2018

Economics. Explained.  

Purchasing Manager’s Index

May 1, 2018

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 2.0 points in March to 57.3 after having declined 1.5 points in March.   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 4.3% 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 fell 0.7 point in April after having declined 2.3 points in March.  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.  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 March’s reading, but still at or above 60 percent for the 12th straight month. Customer inventories remain too low, and backlog expansion maintained high levels.”

In addition to orders, the production component declined 3.8 points in April to 57.2 after having fallen 1.0 point in March.  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; however, the index fell below 60 for the first time in 10 months. Labor constraints and supply chain disruptions continue to prevent or limit maximum production potential.”

The employment index fell 3.1 points in April to 54.2 after having declined 2.4 points in March.  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 expansion continues at slower rates due to companies struggling to hire skilled workers. Many respondents continue to see the labor market as a constraint to their production and their suppliers’ 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 rose 2.2 points in April to 62.0 after having been unchanged in March at 59.8  This is the highest level for this series since May 2004, when it registered 63 percent.   “Backlog expansion continued during the period. Strong backlog, low levels of customer inventory and continued strong new order expansion indicates that production requirements should remain robust through Q2.”

The prices paid component rose 1.2 points in April to 79.3 after having jumped 3.9 points in March.  This is the highest reading for prices since April 2011.  “The increases in prices across all industry sectors continues.”  Specifically, 17 of the 18 industries surveyed paid higher prices for raw materials in April than they did in March.   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 2.8% in 2018.  During that period of time the manufacturing sector will continue to expand at a moderate pace.

Stephen Slifer


Charleston, SC

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