Wednesday, 15 of August of 2018

Economics. Explained.  

Purchasing Manager’s Index

August 1, 2018

The Institute for Supply Management’s index of conditions in the manufacturing sector fell 2.1 points in July to 58.1 after having risen 1.5 points in June.   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 July is annualized it corresponds to a 4.6% 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 3.3 points in July to 60.2 after having edged lower by 0.2 point in June.  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, however tariffs do seem to be taking a moderate toll.  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 15th straight month.”

In addition to orders, the production component fell 3.8 points in July to 58.5 after having climbed 0.8 point in June.  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 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 continues. Labor constraints throughout the supply chain and transportation difficulties continue to limit full production potential.”

The employment index rose 0.5 point in July to 56.5 after having fallen  0.3 point in June.  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 continued to note 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 5.4 points in July to 54.7 after having declined 3.4 points in June.   The May level of 63.5 was the highest level for this series since April 2004, when it registered 66.5 percent.  “Backlog expansion continued during the period, but at lower expansion levels. Continued low levels of customer inventory and strong new order expansion support production requirements in the near term.””

The prices paid component declined 3.6 points in July to 73.2 after having fallen 2.7 points in June.  The May level of 79.5 was 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 has seen 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 3.1% 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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