Good News for Manufacturing

As many of you know the Institute for Supply Management (ISM) releases two significant reports each month. The reports measure, index, and correlate manufacturing and non-manufacturing activities with other measurement readings from the government and elsewhere.

Let’s have a look at some of the positives found in their manufacturing report released last week:

Although the manufacturing sector report still indicated recessionary trends, “the decline was slower than experienced in December.” Additionally, the overall “PMI index” used by the ISM points to a much slower annualized GDP decline than the 3.6% reported for Q4. The ISM measurements now shows that annualized declining rate to be at 1.7% (That’s 0.425% on a quarterly basis compared to the 0.9% quarterly, reported for Q4 2008)

Further positives points to declines in the costs that manufactures need to pay for their inputs with no commodities reported in short supply. Ultimately these decreases in costs and ease of access to materials can be passed on as lower prices to the end consumers.

Several manufacturing sub-segments are now reporting economic growth. They include the Textile Mills; and Petroleum & Coal Products. Quite surprisingly the Machinery segment reported, "Sales are settling in; Q4 was better than expected."

Looking at specific indexes, ISM's New Orders Index was over 10 percentage points higher in January than the seasonally adjusted reading in December. Although the index still indicates contraction in total orders, the significant index move up in January is a leading indicator of slowing contraction. Further, in January two industries actually reported growth in new orders: Textile Mills; and Food, Beverage & Tobacco Products.

The Production Index also increased by 5.8 percentage points from December's reading. Again the index reading pointed to further overall contraction, but at a significantly slowed pace. And three industries now reported production growth: Textile Mills; Petroleum & Coal Products; and Food, Beverage & Tobacco Products.

As you might expect, those manufacturing segments that are now seeing new orders, and increases in production are the first to indicate growth in their payrolls in January. The top segment for employment growth was indeed the Petroleum & Coal Products segment.

Additionally, in a healthy change from the reported Q4 buildup in inventories, manufacturers' inventories contracted in January, with the only industry to report higher inventories being the Computer & Electronic Products industry. All others reported declines in inventories.

Backlog decline is also slowing. The ISM's Backlog of Orders Index was 6.5% higher in January, with 53 percent of survey respondents reporting improving or no change in their backlogs from December.

This is no doubt the healthiest manufacturing report that I’ve seen since this recessionary cycle began. These indexes provide a handful of leading manufacturing indicators, most of them now pointing to a marked decrease in the rate of contraction in the manufacturing industry.

Further evidence that a halt to economic contraction and return to growth by summer is quite possible.