Manufacturing Leads Economy Up

April 1, 2002
The manufacturing sector has shown some big surprises in the recent Purchasing Management Index.

Is the recession over already? It is according to one of the oldest surveys in manufacturing. It’s called the PMI (Purchasing Management Index), and it has been published monthly for more than 70 years by the group that represents the purchasing managers of the United States.

Formerly the National Association of Purchasing Managers, it has, as of January, been renamed the Institute for Supply Management (ISM). Its latest survey strongly suggests that the economy in general and manufacturing in particular have not only bottomed out, but are poised for some pretty strong growth — starting now.

The PMI was established back in 1931 and has been continuously reporting data based upon a survey of members who are responsible for everything from lubricants to capital spending. The latest numbers, from February, are heartening indeed. The PMI showed growth for the fourth consecutive month with a clear trend upward in February.

The manufacturing sector, however, showed the biggest surprises. After 18 months of contraction, manufacturing registered its first growth rating with a rating for new orders at 62.8 for February. The rating system used by ISM is based on percentages of respondents who say “better, worse or same” in answer to questions about new orders, employment, deliveries and so on.

The PMI for February indicates that the economy grew during the month with an index of 54.7 percent. That is the first month of definite and significant growth after a year and a half of decline. It’s also significant, ISM notes, when compared to January’s 49.9 percent. A reading above 50 has usually meant the sector is expanding and below means it is contracting. In other words, the factories and shops of the country have been quietly expanding in terms of business activity for more than two months. The lowest point in the ISM survey for the past year was in October 2001 when the PMI hit 39.5.

In terms of the economy as a whole, a PMI above 42.7 generally means expansion. It has been above that level for four months now and this has led ISM and others to up their forecast numbers for the rest of the year.

“The past relationship between the PMI and the overall economy indicates a 3.5 percent growth rate in GDP for 2002,” says Norbert J. Ore, CPM, chairman of the ISM manufacturing business survey committee and group director strategic sourcing and procurement for Georgia Pacific Corporation. “However,” he concludes, “if the February numbers hold, that rate estimate would be 4.4 percent.”

Other organizations have raised their outlook numbers accordingly, including major banks and the Fed. Perhaps they also read the more detailed parts of the ISM survey about manufacturing in particular, for those numbers are even more dramatic.

That 62.8 number for new manufacturing orders in February was up from 55.3 in January and 55.5 in December of 2001, following 48.4 in November. In other words, the last two months have seen manufacturing business conditions improve markedly from the low points of last year. Production figures in the survey reflected this and were up in a comparable way.

Various economists and assorted pundits have been trying to explain this seemingly quick turnaround from 9/11 and from the recession by suggesting that “new tools of the financial world” are somehow to be credited with the rapid recovery. Others note that the “consumer never really left the shopping malls.” Still others credit the Fed and its ability to dampen “irrational exuberance” for a year, only to turn on the money spigot for a year following. May I suggest a far simpler explanation?

It is this. Manufacturing in America today is a matter of super-fast teams of professionals and highly skilled workers. Inventory management in industry in particular is a modern science.

Manufacturing engineering is a highly developed art when it comes to creative production process development. Manufacturing companies big and small have learned a lot — and well — over the past few decades. Their preparedness shows it. Their response times show it.

And soon their bottom lines will show it as well. No group is more tuned in to what its markets need and want than modern manufacturing. Use of technology related to automation and quality control allows manufacturers to respond with speeds unheard of a few years ago.

Seems to me that most Americans from all walks of life are largely ignorant of the essence of any modern economy. It’s you and your company, your industries, that make the world we call “modern,” modern.

Financial tools help. A wise Fed leadership helps. So do good schools and safe environments. Movies and television and theme parks are fun, and let’s all love the consumer. But none of that is possible without a successfully managed manufacturing core in a free market economy.

George Weimer, contributing editor, [email protected]

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