Drop in ISM Manufacturing Index Could Spell Slow-Down for Steel Industry
The Institute for Supply Management (ISM) released their closely watched Purchasing Manager Index (PMI) for the manufacturing segment of the U.S. economy. The ISM reported the manufacturing sector of the economy expanded for the 22nd consecutive month. The PMI released earlier this morning registered 6.9 points below the prior month and was reported at 53.5 percent. Any reading above 50.0 indicates an expansion of the manufacturing sector of the economy.
The 53.5 reading, although signaling an expansion, is the first reading below 60.0 during 2011 and is the lowest reading recorded over the past 12 months. Not a good sign for manufacturing (and the steel industry) if the downward trend continues.
According to the Institute for Supply Management press release, “A PMI in excess of 42.5 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 24th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 22nd consecutive month. Holcomb stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through May (59.5 percent) corresponds to a 5.9 percent increase in real gross domestic product (GDP). In addition, if the PMI for May (53.5 percent) is annualized, it corresponds to a 3.8 percent increase in real GDP annually."
From a steel perspective, New Orders declined by 10.7 points and is now at 51.0 – growing but at a reduced pace. Customer inventories continue to be “low” and manufacturer inventories are contracting which could assist the domestic steel mills order books as customers will need to respond quickly with any potential surge in business. Although the New Order portion of the ISM survey is troublesome and could well mean there will not be a surge in orders and we will remain “status quo” or drop below current production levels.