April 5, 2017

March ISM Indices Decline, But Still Sufficiently Expansionary

Filed under: Economy — Tom @ 5:02 pm

First, Manufacturing, issued Monday (paragraph breaks added by me and bolds are mine throughout this post):

Economic activity in the manufacturing sector expanded in March, and the overall economy grew for the 94th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

The March PMI® registered 57.2 percent, a decrease of 0.5 percentage point from the February reading of 57.7 percent. The New Orders Index registered 64.5 percent, a decrease of 0.6 percentage point from the February reading of 65.1 percent. The Production Index registered 57.6 percent, 5.3 percentage points lower than the February reading of 62.9 percent.

The Employment Index registered 58.9 percent, an increase of 4.7 percentage points from the February reading of 54.2 percent.

Inventories of raw materials registered 49 percent, a decrease of 2.5 percentage points from the February reading of 51.5 percent. The Prices Index registered 70.5 percent in March, an increase of 2.5 percentage points from the February reading of 68 percent, indicating higher raw materials prices for the 13th consecutive month.

Consistent with generally positive comments from the panel, all 18 industries reported growth in new orders for the month of March.

Of the 18 manufacturing industries, 17 reported growth in March in the following order: Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Furniture & Related Products; Textile Mills; Machinery; Primary Metals; Miscellaneous Manufacturing; Wood Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Paper Products; Transportation Equipment; Chemical Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; and Petroleum & Coal Products. No industry reported contraction in March compared to February.

The GDP drivers are all still quite positive: New Orders and Production above, and Backlog of Orders, which at 57.5 percent (up from 57.0 percent) is surely at its highest level in many years or darned near it. There doesn’t seem to be any way that the first two numbers can stay in the 60s for a long time.

Backlog of Orders is underappreciated in significance. If there is a hefty reliable backlog of orders manufacturers can better plan their production runs and achieve efficiencies. Responding to orders on an “as they come in” basis is by definition more chaotic.

Even after considering the positive-selection bias I believe is present in this report, this Monday news was very strong.

Now, to Non-Manufacturing, released Wednesday morning:

Economic activity in the non-manufacturing sector grew in March for the 87th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 55.2 percent, which is 2.4 percentage points lower than the February reading of 57.6 percent. This represents continued growth in the non-manufacturing sector at a slower rate.

The Non-Manufacturing Business Activity Index decreased to 58.9 percent, 4.7 percentage points lower than the February reading of 63.6 percent, reflecting growth for the 92nd consecutive month, at a slower rate in March. The New Orders Index registered 58.9 percent, 2.3 percentage points lower than the reading of 61.2 percent in February.

The Employment Index decreased 3.6 percentage points in March to 51.6 percent from the February reading of 55.2 percent. The Prices Index decreased 4.2 percentage points from the February reading of 57.7 percent to 53.5 percent, indicating prices increased for the 12th consecutive month, at a slower rate in March.

According to the NMI®, 15 non-manufacturing industries reported growth in March. The sector continues to reflect growth; however, the rate of growth has declined since last month. The majority of respondents’ comments indicate a positive outlook on business conditions and the overall economy. There were several comments about the uncertainty of future government policies on health care, trade and immigration, and the potential impact on business.

INDUSTRY PERFORMANCE

The 15 non-manufacturing industries reporting growth in March — listed in order — are: Management of Companies & Support Services; Utilities; Wholesale Trade; Mining; Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Accommodation & Food Services; Retail Trade; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Transportation & Warehousing; Construction; Finance & Insurance; Other Services; and Public Administration. The three industries reporting contraction in March are: Information; Educational Services; and Professional, Scientific & Technical Services.

The three GDP drivers remained strong, though Business Activity and New Orders pulled back from what I believe were unsustainable levels above 60 percent in February. Backlog of Orders pulled back a little to 54 percent from 53 percent.

The Non-Manufacturing Index shows expansion slowing. But if you cut its value for positive-selection bias, it’s still sufficiently positive not to be alarming.

Zero Hedge doesn’t agree, claiming that “The ‘Soft Data’ Euphoria Is Over.” I would agree that the very favorable confidence survey data is stronger than the underlying reality, but that the underlying reality, at least in reflected in these two reports, is still quite positive.

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