ISM Manufacturing Index Down in August but Still in Expansion Zone

Written by Peter Wright

The Institute of Supply Management released their August report on September 1st. An explanation of the ISM index is given at the end of this piece. After seven straight months of decline the three month moving average (3MMA) of the index gained 0.67 points in June and 0.40 points in July. August gave back 0.57 points to a value of 52.43. Any number >50 indicates expansion. The three month moving average is above the 305 month average since March 1990 which stands at 52.21. There has only been one month in over five years that the index has not exceeded the positive growth threshold of 50 (Figure 1).

Table 1 shows the break down for August by sub index with the monthly result, the 3MMA, the growth of the 3MMA m/m and y/y for each.

The table shows that the 3MMA y/y growth was negative 4.30 which was the sixth consecutive month of negative growth y/y after eleven straight months of positive year over year growth. Month over month, and year over year the only component to have a positive result on a 3MMA basis was customer inventories. Compared to the July report there was a deterioration in seven of the eight sub-indexes. Supplier deliveries being the only one to improve.

SMU Comment: The ISM index is in general agreement with the Federal Reserve Industrial Production Index which has had positive year over year growth for 64 months but on a 3MMA basis the rate of growth has slowed every month since since January.

The official news release from the ISM reads as follows:

August Manufacturing ISM Report on Business PMI at 51.1 percent

New Orders, Production, and Employment Growing Supplier Deliveries Slower, Inventories Contracting

Economic activity in the manufacturing sector expanded in August for the

32nd consecutive month, and the overall economy grew for the 75th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee. “The August PMI registered 51.1 percent, a decrease of 1.6 percentage points from the July reading of 52.7 percent. The New Orders Index registered 51.7 percent, a decrease of 4.8 percentage points from the reading of 56.5 percent in July. The Production Index registered 53.6 percent, 2.4 percentage points below the July reading of 56 percent. The Employment Index registered 51.2 percent, 1.5 percentage points below the July reading of 52.7 percent. Inventories of raw materials registered 48.5 percent, a decrease of 1 percentage point from the July reading of 49.5 percent. The Prices Index registered 39 percent, down 5 percentage points from the July reading of 44 percent, indicating lower raw materials prices for the 10th consecutive month. The New Export Orders Index registered 46.5 percent, down 1.5 percentage points from the July reading of 48 percent. Comments from the panel reflect a mix of modest to strong growth depending upon the specific industry, the positive impact of lower raw materials prices, but also a continuing concern over export growth.”

Of the 18 manufacturing industries, 10 are reporting growth in August in the following order: Textile Mills; Furniture & Related Products; Paper Products; Nonmetallic Mineral Products; Chemical Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Fabricated Metal Products; Plastics & Rubber Products; and Machinery. The six industries reporting contraction in August — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Electrical Equipment, Appliances & Components; Petroleum & Coal Products; Computer & Electronic Products; and Transportation Equipment.

Explanation: The Manufacturing ISM Report On Business is published monthly by the Institute for Supply Management, the first supply institute in the world. Founded in 1915, ISM exists to lead and serve the supply management profession and is a highly influential and respected association in the global marketplace. ISM’s mission is to enhance the value and performance of procurement and supply chain management practitioners and their organizations worldwide. This report has been issued by the association since 1931, except for a four-year interruption during World War II. The report is based on data compiled from purchasing and supply executives nationwide. Membership of the Manufacturing Business Survey Committee is diversified by NAICS, based on each industry’s contribution to gross domestic product (GDP). The PMI is a diffusion index. Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI in excess of 42.2 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.2 percent, it is generally declining. The distance from 50 percent or 42.2 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, ISM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

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