We have a new manufacturing sector economic activity report from the Institute for Supply Management—The Purchasing Manager’s Index—showing continued solid growth in the segment.
I also received an analysis from PwC’s Bobby Bono. His remarks are interesting including events in Washington that could change the rules of the game.
Long experience tells me that little that goes on in Washington significantly affects the economy. Presidents run for election on the economy, and are sometimes elected on it, but most of the time market forces and technology changes render their efforts dead on arrival. An exception, as Bono points out, could possibly be a trade war instigated by Trump. So far, all his tweets seem to be more geared toward getting people to the negotiating table (his forte, I guess), than in any unilateral action. Regardless, the underlying economy still looks strong. We can only hope.
In brief:
- New Orders, Production, and Employment Growing
- Supplier Deliveries Slowing at Slower Rate; Backlog Same
- Raw Materials Inventories Growing; Customers’ Inventories Too Low
- Prices Increasing at Faster Rate; Exports and Imports Growing
The report:
Economic activity in the manufacturing sector expanded in March, and the overall economy grew for the 107th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business.
The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee:
The March PMI registered 59.3 percent, a decrease of 1.5 percentage points from the February reading of 60.8 percent. The New Orders Index registered 61.9 percent, a decrease of 2.3 percentage points from the February reading of 64.2 percent. The Production Index registered 61 percent, a 1 percentage point decrease compared to the February reading of 62 percent. The Employment Index registered 57.3 percent, a decrease of 2.4 percentage points from the February reading of 59.7 percent. The Supplier Deliveries Index registered 60.6 percent, a 0.5 percentage point decrease from the February reading of 61.1 percent. The Inventories Index registered 55.5 percent, a decrease of 1.2 percentage points from the February reading of 56.7 percent. The Prices Index registered 78.1 percent in March, a 3.9 percentage point increase from the February reading of 74.2 percent, indicating higher raw materials prices for the 25th consecutive month. Comments from the panel reflect continued expanding business strength. Demand remains robust, with the New Orders Index at 60 or above for the 11th straight month, and the Customers’ Inventories Index at its lowest level since July 2011. The Backlog of Orders Index continued a 14-month expansion with its highest reading since May 2004, when it registered 63 percent.
Consumption, described as production and employment, continues to expand, with indications that labor and skill shortages are affecting production output. Inputs, expressed as supplier deliveries, inventories and imports, were negatively impacted by weather conditions; Asian holidays; lead time extensions; steel and aluminum disruptions across many industries; supplier labor issues; and transportation difficulties due to driver and equipment shortages. Export orders remained strong, supported by a weaker U.S. currency. The Prices Index is at its highest level since April 2011, when it registered 82.6 percent. In March, price increases occurred across 17 of 18 industry sectors. Demand remains robust, but the nation’s employment resources and supply chains are still struggling to keep up.
Of the 18 manufacturing industries, 17 reported growth in March, in the following order: Fabricated Metal Products; Plastics & Rubber Products; Computer & Electronic Products; Paper Products; Printing & Related Support Activities; Nonmetallic Mineral Products; Transportation Equipment; Petroleum & Coal Products; Wood Products; Machinery; Chemical Products; Textile Mills; Electrical Equipment, Appliances & Components; Furniture & Related Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Primary Metals. The only industry reporting a decrease during the period is Apparel, Leather & Allied Products.
Bobby Bono, PwC’s U.S. Industrial Manufacturing Leader, offers the following analysis.
The PMI manufacturing index decreased 1.5 points, but remains high at 59.3; prices reached their highest level in 7 years ahead of a potential trade war
The ISM Purchasing Manager’s Index (PMI) for manufacturing survey dropped 1.5 points to 59.3 for the month of March 2018. While a significant drop from last month’s 60.8, last month was the highest the PMI reached in the last 14 years and March remains above the 90th percentile of PMI reports since 2000.
The continued positive economic environment has led to supply constraints and a buildup in the price index, which now stands at 78.1, its highest level in 7 years. Price increases occurred across 17 of 18 industry sectors in March as New Orders also dropped 2.3 points. While the full impact of tariffs and a potential trade war have not set in, some companies are beginning to see signs across select commodity prices and concern around overall global demand rise.
But with any change in rules, businesses need to learn what those rules are, how they will impact their business, and then how to adjust. Most manufacturers already build locally. There have been so many changes already in American regulations that they long ago realized it’s best for their business to build for American sales in North America, and to build for European sales in Europe to meet demand. It’s not 100% local but it’s heavily weighted. Manufacturers want to be close to their customers.
How businesses adapt to the new regulations will speak to their inherent strategy. If they weren’t as flexible as they should have been, this may be a challenge. Commodity prices often move more than 10% in a year, so this tariff is not that different from that. It’s actually more predictable.
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