Manufacturing Update: Signs of a Slowdown in ISM Index, Auto Sales

Figure 1 summarizes the 11 individual data streams. All indicators except automobile sales and the ISM Index have positive growth on a year-over-year basis. However, growth rates of some indicators are slowing.

The Industrial Production Index

Figure 2 shows the three-month moving average (3MMA) of the IP index since January 2007 as the blue line and the year-over-year growth as the brown bars. March 2017 was the first month of positive growth in the 3MMA since April 2015. Growth has been above 3 percent every month since November 2017, reaching 5.1 percent in October 2018 before declining to 3.3 percent in March. Manufacturing capacity utilization improved from 74.48 percent in January 2017 to 76.56 percent in March 2019, also on a 3MMA basis (Figure 3).

New Orders for Durable Goods (Advance Report)

New orders for manufactured durable goods in February were up by 3.3 percent year over year, which was a decline from a 9.7 percent growth rate in September last year. Figure 4 shows the 3MMA since January 2010.

The Durable Goods Portion of GDP

The third estimate of Q4 2018 GDP growth was reported as 2.2 percent annualized, which was down from 4.2 percent in the second quarter. A subcomponent of the quarterly data is durable goods, which is part of the personal consumption calculation. It therefore contains no military hardware or civil aircraft data. This is shown in Figure 5 and, presumably because of the exclusions just mentioned, looks nothing like the blue line in Figure 4. The durable goods portion of GDP declined in Q1 2018, but the long-term trend is still very positive.

New Orders for Manufactured Products

New orders for manufactured products as reported by the Census Bureau declined every month October through February on a 3MMA basis. In February, the year-over-year growth was 2.6 percent, down from 9.0 percent in September (Figure 6).

New Orders for Products Manufactured from Iron and Steel

Within the Census Bureau M3 manufacturing survey is a subsection for new orders for iron and steel products. Figure 7 shows the history since January 2000 and that the growth rate has declined since September but is still a healthy 11.1 percent.

Inventories of Products Manufactured from Iron and Steel

The biggest change in these 11 data streams since our last update was the decline in inventories of iron and steel products. The inventory build was at a rate of 10.4 percent year over year in November and fell to 0.8 percent in February (Figure 8).

Light Vehicle Sales in the U.S

Automobile sales have trended down slightly in the last three years as measured by the cyclical peaks. Year over year on a 3MMA basis, sales were down by 1.7 percent. Sales in March totaled 17.5 million units annualized and were comprised of 70.1 percent light trucks and 29.9 percent autos. The declining sale of autos in the last three years has resulted in GM announcing its intent to close several small car plants. The light truck category includes SUVs and crossovers. Overall, sales are still higher than the pre-recession level (Figure 9). Import market share in March was 22.3 percent and has been drifting up since early 2015.

Manufacturing Employment

Manufacturing employment plummeted during the recession and gradually improved from the spring of 2010 through 2014. Growth was flat in 2015 and declined slightly in 2016 when 23,000 jobs were lost during the year as a whole. There was a turnaround in 2017 and in the 12 months April 2018 through March 2019, 209,000 manufacturing jobs were created (Figure 10). The motor vehicles and parts subcomponent of manufacturing employment had a net gain of only 4,000 in the same time frame.

Manufacturing Productivity

The Bureau of Labor Statistics reported that in Q3 2018 manufacturing productivity surged by 1.5 percent year over year and maintained a 0.7 percent growth in Q4 (Figure 11).

The ISM Manufacturing Index

The Institute for Supply Management’s Manufacturing Index is a diffusion index. ISM states: “Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index value above 50 indicates that the manufacturing economy is generally expanding; below 50 indicates the opposite.” Figure 12 shows the 3MMA of the ISM index from January 1997 through March 2019. The index surged from January 2016 through October 2017, but declined every month since September through February with a small increase in March 2019. The 3MMA of the index in March was 55.37, down from 59.87 in August and down by 4.37 percent year over year.

SMU Comment: Manufacturing activity is still strong, though there is evidence of the growth rate slowing. The most encouraging current data point is the improvement in manufacturing labor productivity in the third and fourth quarters of 2018. These were the best back-to-back quarters since mid-2013. Automobile sales have been drifting down from an unsustainable level in late 2015 when they reached an annualized rate of over 18 million units. We should keep our eye on the ISM index, which though still strong has had negative growth year over year every month since last October.