Wednesday, February 2, 2011

ISM Prints Strong Number

From the ISM:
"The manufacturing sector grew at a faster rate in January as the PMI registered 60.8 percent, which is its highest level since May 2004 when the index registered 61.4 percent. The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector. New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004. Global demand is driving commodity prices higher, particularly for energy, metals and chemicals."

Of the 18 manufacturing industries, 14 are reporting growth in January, in the following order: Petroleum & Coal Products; Primary Metals; Apparel, Leather & Allied Products; Wood Products; Computer & Electronic Products; Transportation Equipment; Fabricated Metal Products; Machinery; Paper Products; Miscellaneous Manufacturing; Chemical Products; Furniture & Related Products; Food, Beverage & Tobacco Products; and Electrical Equipment, Appliances & Components. The four industries reporting contraction in January are: Textile Mills; Printing & Related Support Activities; Plastics & Rubber Products; and Nonmetallic Mineral Products.
Like the recent Chicago PMI, this report is also strong. Numbers are the highest in years and the vast majority of industries are expanding.

Let's take a look at the anecdotal component of the report:
  • "Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs." (Transportation Equipment)
  • "Lead times are increasing significantly, and commodity pricing is starting to increase." (Chemical Products)
  • "January/February sales will be decent, and we see a strong March. We're cautiously optimistic but reluctant to hire." (Fabricated Metal Products)
  • "Business is still slow with no pick-up in sight." (Furniture & Related Products)
  • "We continue to see unexpected strength in many non-U.S. markets." (Fabricated Metal Products)
Here we see the following concerns:

1.) Commodity prices are increasing, hurting input costs
2.) Overseas markets are stronger then anticipated, with the weaker dollar helping (which also hurts commodity price inputs)
3.) There is still reluctance for hiring.

Here are some of the more important component parts of the report:

Manufacturing continued to grow in January as the PMI registered 60.8 percent, an increase of 2.3 percentage points when compared to December's seasonally adjusted reading of 58.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42.5 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the PMI indicates growth for the 20th consecutive month in the overall economy, as well as expansion in the manufacturing sector for the 18th consecutive month. Ore stated, "The past relationship between the PMI and the overall economy indicates that the PMI for January (60.8 percent) corresponds to a 6.4 percent increase in real gross domestic product (GDP) on an annual basis."


ISM's New Orders Index registered 67.8 percent in January, which is an increase of 5.8 percentage points when compared to the seasonally adjusted 62 percent reported in December. This is the 19th consecutive month of growth in the New Orders Index. A New Orders Index above 52.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).


ISM's Production Index registered 63.5 percent in January, which is an increase of 0.5 percentage point from the December reading of 63 percent (seasonally adjusted). An index above 51 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. This is the 20th consecutive month the Production Index has registered above 50 percent.

Simply put, this is another stellar report from the manufacturing sector.