Manufacturing finishes first half of 2018 strongly, reports ISM

As the months move along in 2018, so, too, does the strong momentum in the manufacturing sector, based on the Institute for Supply Management’s (ISM) Manufacturing Report on Business, which was released today.

ISM said that the PMI, the report’s key metric, headed up 1.5% in June to 60.2 (a reading of 50 or higher indicates growth). This marks the 22nd consecutive month of PMI growth, with the overall economy now having grown for 110 straight months. The June PMI reading is 1.2% ahead of the 12-month average of 59.0. What’s more, June marks the third month the PMI has topped 60 in 2018 and along with September 2017, which also had a 60.2 reading, is the second-best month over the last 12 months. June also marks the second highest month of 2018 for the PMI, with February’s 60.8 in the top spot.

ISM reported that 17 of the 18 manufacturing sectors reported growth in June, including: Textile Mills; Wood Products; Nonmetallic Mineral Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Paper Products; Transportation Equipment; Furniture & Related Products; Machinery; Primary Metals; Miscellaneous Manufacturing; Chemical Products; Petroleum & Coal Products; and Plastics & Rubber Products.  And it added that no industry reported a decrease in June compared to May.

Despite another month of PMI growth, not all of the report’s metrics were up in June.

New orders, which are commonly referred to as the engine that drives manufacturing, dipped 0.2% to 60.2, while still growing for the 30th consecutive month and remaining above 60 for the 14th consecutive month. Sixteen of 18 manufacturing sectors reported new orders growth in June. Inventories were up 0.6% to 50.8, growing for the sixth month in a row.

Comments submitted by ISM member respondents for the report were mostly positive, with some concerns mixed in, too.

A chemical sector respondent said that business is strong in all regions, with materials tight, adding that trucking continues to be a major challenge. A paper products respondent said that the steel tariffs are continuing to drive uncertainty, noting that projects and services using steel have limited days that prices are good for. This respondent also cited trucking-related issues, with the tight capacity in trucking requiring advanced planning and increasing costs.

“Demand is excellent,” said ISM Manufacturing Business Survey Committee Chair Tim Fiore said in an interview. “It is high across lots of industry sectors….with transportation and computers and electronics at the top of the expansion list. Backlog of orders softened slightly but still above 60, so it is not soft there. Demand was ahead of expectations and continues a run of torrid growth, with new orders topping 60 for the last 14 months. This is the longest run in modern times.”

Fiore added that production and employment were both solid in June, with the strong production number indicating that production was not negatively impacting production.

And with supplier deliveries and inventories each posting solid numbers, he said that they were key in the month’s strong performance.

“We really did not think that suppliers would be able to deliver any better, and, therefore, the inventory count did not really buzz much…in fact, it is still sitting pretty close to a contraction,” he said. “That is a concern, because we need a healthy amount of inventory to maintain flexibility in your manufacturing plant. I am concerned we may not have that flexibility, and we will see how it goes. The biggest contributor to expansion in June was the supplier deliveries number, which was up 6.2%.”

The main reason for that jump, he said, was transportation and freight problems, which he described as a “problem with no end in sight” and a period of a schedule hole, where a lot of companies are struggling to get their steel and aluminum in order to meet factory demand. That is happening right now and is likely putting a lot of pressure on over the road trucking and airfreight.”

Other notable metrics from the June Manufacturing Report on Business included:

• supplier deliveries at 68.2 (a reading above 50 for this metric indicates contraction) up 6.2% and slowing at a faster rate for the 21st consecutive month;
• customer inventories up 0.1% to 39.7 and remaining “too low” for the 21st month in a row;
• prices down 2.7% to 76.8 and increasing for the 28th consecutive month; and
• backlog of orders down 3.4% to 60.1 while still growing for the 17th consecutive month

IHS Markit U.S. Economist Michael Montgomery was mostly bullish about the ISM’s release.

“The awkward item in the report is both a plus and a warning,” he wrote in a research note. “The supplier deliveries score bounced up to 68.2, climbing by 6.2 points from May. That is a plus for the overall PMI, as it means that future output of suppliers needs to grow. It is a warning, however, as it means that materials and supplies are becoming harder to acquire. The laundry list of items in short supply keeps growing. That could put a damper on the party later this year if supply conditions do not get better. The ongoing good news should make manufacturers happy, and continues to suggest robust gains in the second half. Most businesses will tolerate supply chain headaches when accompanied by robust sales gains, but it does take some of the bloom off the rose when businesses are scrambling for supplies. Nevertheless, this kind of strength is rare, and most manufacturers will take it. Tariffs were a major source of manufacturing concern in the comments. These were mostly the buyers of contentious products rather than sellers, but buyers of steel and aluminum are more numerous than sellers by headcount, so such issues get a buyers’ perspective in the PMI. For now, things look great, but many buyers are going to struggle to keep their heads above water between Independence Day and Labor Day, if not Thanksgiving.”