Economy

ISM Manufacturing Index down in July, 3MMA Advanced

August 4, 2015

The Institute of Supply Management released their July report on August 3rd. An explanation of the ISM index is given at the end of this piece. After seven straight months of decline the index gained 1.3 points in May a further 0.7 points in June then declined by 0.8 points in July to 52.7 with a three month moving average of 53.0. The 3MMA declined for seven straight months between October and May then increased in June and July. Any number >50 indicates expansion. The three month moving average at 53.0 is above the 304 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 July 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 2.83 which was the fifth consecutive month of negative growth y/y after eleven straight months of positive year over year growth. The good news is that after seven straight months in which the 3MMA declined, June and July reversed that trend. Month over month new orders, prices and employment advanced. The backlog of new orders and supplier deliveries declined. Production and inventories were unchanged. On a year over year basis, the 3MMA of all sub-indexes except customer inventories deteriorated. This y/y pattern was the same as May and June.

The low point of the ISM manufacturing index was March and April, both at 51.5. As these months have been dropped from the 3MMA this measure of the index has improved as shown in Figure 1. This morning, (August 4th) the Census Bureau reported that new orders for manufactured goods in June increased by $8.7 billion or 1.8 percent to $478.5 billion and backlog increased. Through June there has not been a turnaround in the Industrial production index reported by the Federal Reserve which still has positive year over year growth but the rate of growth has been slowing since January.

The official news release from the ISM reads as follows:

July Manufacturing ISM Report On Business PMI at 52.7 percent

(Tempe, Arizona) — Economic activity in the manufacturing sector expanded in July for the 31st consecutive month, and the overall economy grew for the 74th 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 July PMI registered 52.7 percent, a decrease of 0.8 percentage point below the June reading of 53.5 percent. The New Orders Index registered 56.5 percent, an increase of 0.5 percentage point from the reading of 56 percent in June. The Production Index registered 56 percent, 2 percentage points above the June reading of 54 percent. The Employment Index registered 52.7 percent, 2.8 percentage points below the June reading of 55.5 percent, reflecting growing employment levels from June but at a slower rate. Inventories of raw materials registered 49.5 percent, a decrease of 3.5 percentage points from the June reading of 53 percent. The Prices Index registered 44 percent, down 5.5 percentage points from the June reading of 49.5 percent, indicating lower raw materials prices for the ninth consecutive month. Comments from the panel reflect a combination of optimism mixed with uncertainties about international markets and the impacts of the continuing decline in oil prices.”

Of the 18 manufacturing industries, 11 are reporting growth in July in the following order: Textile Mills; Paper Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Furniture & Related Products; Fabricated Metal Products; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Transportation Equipment; and Miscellaneous Manufacturing. The five industries reporting contraction in July are: Wood Products; Primary Metals; Plastics & Rubber Products; Chemical Products; and Machinery.

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.