Manufacturing Activity Almost at Standstill

Manufacturing Activity Almost at Standstill

The October Purchasing Managers Index, issued by the Institute for Supply Management (ISM), decreased 0.1 percentage point from the September reading of 50.2%.

“With the dividing line between growth and decline at 50%, the reports indicate that manufacturing activity is almost at a standstill, neither rising or falling, “ explains noted Daniel J. Meckstroth, chief economist for the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation. “Only 26% of the time in the last 25 years has the index been at or less than 50.1%, so activity is abnormally weak. The good news in the report is that orders and production are improving.”

Looking at specific categories here are the October results”

-The New Orders Index registered 52.9%, an increase of 2.8 percentage points from the reading of 50.1% in September.

-The Production Index registered 52.9%, 1.1 percentage points above the September reading of 51.8%.

-The Employment Index registered 47.6%, 2.9 percentage points below the September reading of 50.5%.

-Backlog of Orders registered 42.5%, an increase of 1 percentage point from the September reading of 41.5%.

-The Prices Index registered 39%, an increase of 1 percentage point from the September reading of 38%, indicating lower raw materials prices for the 12th consecutive month.

-The New Export Orders Index registered 47.5%, up 1 percentage point from September.

- The Imports Index registered 47%, down 3.5 percentage points from the September reading of 50.5%.

“An inventory problem is evident in the report, as both firms and their customers are reducing inventory,”  Meckstroth added. “This drawdown is a symptom of slow production growth and the deflation that is rampant within the goods-producing industries. Falling prices create a financial loss on inventory held, so the incentive is to lower inventory as quickly as possible. Deflation in commodity prices is good for consumers but it causes declining investment spending in extraction and processing industries.

“The trade indicators in the ISM suggest that imports are falling faster than exports,” Meckstroth explained. “With imports being larger in number than exports (because there is a huge trade deficit), the faster decline in imports suggests an improvement in the trade deficit. It is important to remember that while the oil, food, and metal commodity price collapses will lower the dollar value of the trade deficit, the inflation-adjusted trade deficit, which reflects physical volume, will worsen. Foreign trade will be a major drag on manufacturing activity and the general economy this year and over the next two years.

“The October ISM report implies that manufacturing production is going through an inventory adjustment. We believe that there is moderate, sustainable growth in consumer spending that will drive modest and accelerating economic and manufacturing production growth in 2016 and 2017,” Meckstroth concluded. “The shocks this year—the rapid appreciation of the dollar, collapsing commodity prices, severe winter weather, West Coast port strike, deleveraging, etc.—are not likely to repeat again in the coming two years.”

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