By Robert Hughes
The Manufacturing Purchasing Managers' Index (PMI) from the Institute for Supply Management registered a 61.3 reading in August, up from 58.1 in July. That is the 24th month in a row above the neutral 50 level and the highest reading since 2004 (see chart).
For this index, 50 is neutral, with readings above 50 suggesting expansion in manufacturing and readings below 50 suggesting contraction. Typically, the PMI ranges between 45 and 65. Historically, readings above 43.3 suggest expansion for the overall economy. August is the 112th month in a row above 43.3.
Among the five components of the PMI (New Orders, Production, Employment, Supplier Deliveries, and Inventories), all five showed stronger readings in August. The new orders index came in at 65.1, up from 60.2 in July. August was the 32nd consecutive month of readings above 50. A new orders index above 60 is strong by historical measures, and August marks the 16th month in a row that the index has been above 60 (see chart). Since 1985, the new orders index has led the growth in manufacturing output by about five months. The strong results of the ISM new orders index suggest that growth in manufacturing output is likely to accelerate in coming months.
The production index was 63.3 in August, the highest result since January. August marks the 24th month in a row above 50. Historically, readings above 51.5 are consistent with growth in the industrial production index from the Fed. In August, 16 of the 17 industries surveyed reported growth, while just 1, primary metals, reported a decrease in production.
The employment index rose to 58.5 in August, up from 56.5 in July. The favorable reading suggests employment in manufacturing likely increased again in August. Ten of 18 industries reported growth in employment, while 4 saw decreases.
Supplier deliveries, a measure of delivery times for suppliers to manufacturers, came in at 64.5, up from 62.1 in July. It suggests suppliers are falling farther behind in delivering supplies to manufacturers.
The inventories index was 55.4 in August, up from 53.3 in July, suggesting faster growth in inventories. The inventories index has been above 50 for eight consecutive months.
Furthermore, backlogs of orders rose 2.8 percentage points to 57.5 percent in August from 54.7 in July, while the new export orders index came in at 55.2, down just 0.1 percentage points from 55.3 in the prior month. Backlogs of orders have been growing for 19 straight months, while new export orders have been growing for 30 consecutive months.
The one component that raises concern is the price index. The price index fell 1.1 percentage points to 72.1 in August from 73.2 in July. Despite the ease, the price index has been above 50 for 30 months and is above 70 for the 8th consecutive month. The continuing high level of this index suggests manufacturers remain under difficult pressure from rising input costs.
This latest report from the ISM suggests the manufacturing sector continued to grow in August. Strong readings for new orders, production, and employment are particularly favorable, suggesting a positive outlook for manufacturing. Those results are in line with other data recently that point to ongoing expansion for the overall economy.