Sunday, 18 of February of 2018

Economics. Explained.  

Purchasing Manager’s Index

February 1, 2018

The Institute for Supply Management’s index of conditions in the manufacturing sector declined 0.2 point in January to 59.1 after having risen 1.1 points in December.  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 expanding.  If the PMI for January  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 2.0 points in January to 65.4 after having risen 2.3 points in December.  These are the highest levels for the orders component since January 2004.   The ISM indicates that an orders index above 52.4  is consistent with an increase in the Census Bureau’s series on factory orders.  It is clear that orders are accelerating which will boost factory production in the months ahead.

In addition to orders, the production component fell 0.7 point in January to 64.5 after having risen 1.3 points in December .  These are the highest levels 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 early part of 2018.   A level above 51.5 is consistent with an increase in the Federal Reserve’s industrial production figure.

The employment index fell 3.9 points in January to to 54.2 after having declined 1.6 points in December.  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 ten 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 50.8 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 rose 1.3 points in January to 56.2 after having declined 0.1 point in December.  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 jumped 4.4 points in January to 72.7 after having climbed 2.8 points in December.  The September level of 71.5 was the highest reading since May 2011.  Prices continue to climb.  Seventeen of the 18 industries surveyed paid higher prices for raw materials in December than they did in November.   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 2.7% in 2017 and 2.9% in 2018.  During that period of time the manufacturing sector will continue to expand slowly.

Stephen Slifer


Charleston, SC

Leave a comment