Economic activity in the manufacturing sector stays on the expansion side—but backs off a bit

February 04, 2015

According to the latest report from the Institute for Supply Management (ISM) Manufacturing Report on Business, economic activity in this sector expanded in January for the 20th consecutive month. However, it's not as rosy a picture that you might think. The January PMI (Purchasing Managers' Index) registered 53.5%, a decrease of 1.6% from December's seasonally adjusted reading of 55.1%.

While staying on the "expanding" side of the benchmark (above 50 indicates an expansion, below 50 indicates a contraction), manufacturing isn't generally booming. Still, 15 of the 18 manufacturing industries the ISM survey monitors reported growth with Primary Metals at the top of that list. Transportation, which usually ranks high, was 10th on that list.

One respondent in the Transportation sector said, "Consumer demand remains strong for automotive. Seeking alternatives to maximize production with existing production capacity." The West Coast dockworkers slowdown continues to throw a monkey wrench into shipments to/from Asia.

The New Orders Index dropped by 4.9% from 57.8% in December to 52.9% in January, an indication of sluggishness. That could be a result of higher than anticipated Inventories, which grew at a rate in January of 5.5% (from 45.5 in December to 51.0% in January) which means sales are falling off. Customers' Inventories are too low for the second month in a row, dropping another 2.0% to 42.5% in January compared to 44.5% in December 2014. However, with new orders down many manufacturers may be hesitant to increase inventories to a level that becomes costly to maintain. Those figures are also reflected in the lower Production Index numbers, down 1.2% in January to 54.1% from December's 57.7%.

Order Backlog also contracted considerably in January, down 6.5% to 46.0% from December's 52.5%, which also indicated a slowing of manufacturing.

Employment dropped 1.9% in January to 54.1% from December's 56.0. Some of that could be attributed to a Christmas season that was anticipated to be a boom but didn't quite pan out that way.

A quick snapshot of one geographic sector, Texas, came from the Federal Reserve Bank of Dallas, which shows that Texas is slowing as we enter 2015. Texas' 2014 employment grew at a 3.6% rate with the state adding 408,800 jobs, compared to a national rate of just 2.1%.  The Federal Reserve calls for a 2.2% job growth in Texas for 2015.

The U.S. Department of Commerce released its advance report on Durable Goods Manufacturers' Shipments, Inventories and Orders for December 2014 and that shows durable goods (items lasting longer than three years) orders down 3.4% to $230.5 billion. This decrease, down four of the last five months, followed a 2.1% November decrease. Excluding transportation, new orders decreased 0.8%. Excluding defense, new orders decreased 3.2%.

Transportation equipment, also down four of the last five months, led the decrease, $6.8 billion or 9.2% to $66.7 billion.

Shipments of manufactured durable goods in December, up following two consecutive monthly decreases, increased $2.6 billion or 1.1% to $246.8 billion. This followed a 0.7% November decrease. Transportation equipment, up three of the last four months, led the increase, $2.2 billion or 3.1% to $74.5 billion.

Unfilled orders for manufactured durable goods in December, down following 10 consecutive monthly increases, decreased $8.9 billion or 0.8% to $1,267.6 billion, following a 0.2% November increase. Transportation equipment, also down following 10 consecutive monthly increases, led the decrease, $7.9 billion or 1.0$ to $740.0 billion.

Inventories of manufactured durable goods in December, up 20 of the last 21 months, increased $2.0 billion or 0.5% to $410.8 billion. This was the highest level since the series was first published on a NAICS basis in 1992 and followed a 0.5% November increase.

With consumers not loosening their wallets as much as anticipated in December, manufacturing appears to be taking a sluggish turn. That could impact both processors and moldmakers. 

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