ISM manufacturing report upbeat; PMI rises to 57.3%

Economic activity in the manufacturing sector grew in April for the 35th consecutive month, while the overall economy grew for the 54th consecutive month, say the nation's supply executives in the latest Manufacturing ISM Report On Business, released May 1.

"The manufacturing sector grew at a faster rate during April as production and employment showed significant strength," said Norbert J. Ore, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee. "The level of activity is driving some inventory growth as the Inventory Index moved above 50 percent, reversing a 12-month trend. April's index of 57.3 percent is the highest since November 2005. While many members indicate that business is good, they still have major concerns about the impact of higher prices for energy and industrial commodities."

TOP PERFORMING INDUSTRIES

The 15 industries reporting growth in April — listed in order — are: Miscellaneous*; Primary Metals; Transportation & Equipment; Electronic Components & Equipment; Fabricated Metals; Industrial & Commercial Equipment & Computers; Wood & Wood Products; Glass, Stone & Aggregate; Apparel; Food; Printing & Publishing; Instruments & Photographic Equipment; Chemicals; Furniture; and Rubber & Plastic Products.

*Number of months moving in current direction

APRIL 2006 MANUFACTURING INDEX SUMMARIES

PMI

The PMI indicates that the manufacturing economy grew in April for the 35th consecutive month as it registered 57.3 percent, an increase of 2.1 percentage points when compared to March's reading of 55.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI in excess of 42 percent, over a period of time, generally indicates an expansion of the overall economy. The April PMI indicates that both the overall economy and the manufacturing sector are growing. "The past relationship between the PMI and the overall economy indicates that the average PMI for January through April (56 percent) corresponds to a 4.8 percent increase in real gross domestic product (GDP). In addition, if the PMI for April (57.3 percent) is annualized, it corresponds to a 5.3 percent increase in real GDP annually."

THE LAST 12 MONTHS

New Orders

ISM's New Orders Index registered 57.6 percent in April. The index is 0.8 percentage point lower than the 58.4 percent registered in March. April is the 36th consecutive month the index has exceeded 50 percent. A New Orders Index above 51.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars). Fourteen industries reported increases during April: Miscellaneous*; Primary Metals; Transportation & Equipment; Electronic Components & Equipment; Wood & Wood Products; Printing & Publishing; Industrial & Commercial Equipment & Computers; Rubber & Plastic Products; Paper; Glass, Stone & Aggregate; Fabricated Metals; Furniture; Instruments & Photographic Equipment; and Food.

Production

ISM's Production Index registered 60.4 percent in April, 2.9 percentage points higher than the 57.5 percent reported in March. April is the 36th consecutive month of growth in the index. An index above 50 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in April, 14 registered growth: Miscellaneous*; Fabricated Metals; Industrial & Commercial Equipment & Computers; Wood & Wood Products; Transportation & Equipment; Apparel; Primary Metals; Chemicals; Electronic Components & Equipment; Food; Furniture; Instruments & Photographic Equipment; Printing & Publishing; and Rubber & Plastic Products.

Employment

ISM's Employment Index expanded for the 11th consecutive month in April. The index registered 55.8 percent in April compared to 52.5 percent in March, an increase of 3.3 percentage points. An Employment Index above 48.9 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The 12 industries reporting growth in employment during April are: Miscellaneous*; Glass, Stone & Aggregate; Apparel; Food; Transportation & Equipment; Primary Metals; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; Printing & Publishing; Fabricated Metals; Chemicals; and Furniture.

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower for the 34th consecutive month in April. ISM's Supplier Deliveries Index for April registered 57.7 percent, an increase of 4.6 percentage points when compared to March's reading of 53.1 percent. A reading above 50 percent indicates slower deliveries. The 12 industries reporting slower supplier deliveries in April are: Primary Metals; Instruments & Photographic Equipment; Glass, Stone & Aggregate; Miscellaneous*; Textiles; Electronic Components & Equipment; Printing & Publishing; Fabricated Metals; Furniture; Transportation & Equipment; Industrial & Commercial Equipment & Computers; and Chemicals.

Inventories

Manufacturers' inventories reversed a 12-month trend in April as ISM's Inventories Index registered 51.3 percent, a 2.6 percentage point increase when compared to March's reading of 48.7 percent. An Inventories Index greater than 42.2 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories (in chained 2000 dollars). The nine industries reporting higher inventories in April are: Textiles; Apparel; Miscellaneous*; Wood & Wood Products; Fabricated Metals; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; Transportation & Equipment; and Chemicals.

Customers' Inventories**

The ISM Customers' Inventories Index is at 46.5 percent in April, 1.5 percentage points lower than the 48 percent reported in March. The index indicates that respondents believe their customers do not have sufficient inventories on hand (inventories are too low) at this time. This is the 59th consecutive month that the index has registered below 50 percent. Four industries reported higher customers' inventories during April: Textiles; Instruments & Photographic Equipment; Miscellaneous*; and Food.

Prices**

In April, the ISM Prices Index was 71.5 percent, indicating manufacturers are paying higher prices on average when compared to March. While 37 percent of supply executives reported paying the same prices and 10 percent reported paying lower prices, the majority of respondents (53 percent) reported that prices were higher than the preceding month.

A Prices Index above 47.1 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. In April, 14 industries reported paying higher prices: Furniture; Primary Metals; Wood & Wood Products; Fabricated Metals; Transportation & Equipment; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Instruments & Photographic Equipment; Paper; Glass, Stone & Aggregate; Printing & Publishing; Chemicals; Miscellaneous*; and Food.

Backlog of Orders**

ISM's Backlog of Orders Index registered 57 percent, indicating manufacturers' backlogs in April are expanding when compared to March. The index is 2.5 percentage points lower than the 59.5 percent reported in March. Of the 86 percent of respondents who report their backlog of orders, 28 percent reported greater backlogs, 14 percent reported smaller backlogs, and 58 percent reported no change from March. The 11 industries reporting an increase in order backlogs in April are: Apparel; Primary Metals; Transportation & Equipment; Instruments & Photographic Equipment; Industrial & Commercial Equipment & Computers; Miscellaneous*; Food; Fabricated Metals; Wood & Wood Products; Electronic Components & Equipment; and Printing & Publishing.

New Export Orders

ISM's New Export Orders Index registered 53.4 percent in April, a decrease of 3.9 percentage points when compared to March's index of 57.3 percent. This is the 41st consecutive month of growth in export orders. The eight industries reporting growth in new export orders in April are: Primary Metals; Printing & Publishing; Transportation & Equipment; Miscellaneous*; Food; Electronic Components & Equipment; Industrial & Commercial Equipment & Computers; and Chemicals.

Imports**

Imports of materials by manufacturers grew during April as the Imports Index registered 59 percent. The index increased 2 percentage points when compared to March's index of 57 percent, indicating a faster rate of growth. The 11 industries reporting growth in import activity for April are: Miscellaneous*; Transportation & Equipment; Apparel; Fabricated Metals; Instruments & Photographic Equipment; Paper; Wood & Wood Products; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Food; and Chemicals.

*Miscellaneous is a preponderance of jewelry, toys, sporting goods and musical instruments.
**The Backlog of Orders, Prices, Customers' Inventories and Imports Indexes do not meet the accepted criteria for seasonal adjustments.

Buying Policy

Average commitment leadtime for Capital Expenditures decreased 4 days to 114 days. Average leadtime for Production Materials decreased 3 days to 52 days. Average leadtime for Maintenance, Repair and Operating (MRO) supplies decreased 6 days to 23 days.

About this Report

The data presented herein is obtained from a survey of manufacturing supply managers based on information they have collected within their respective organizations. ISM makes no representation, other than that stated within this release, regarding the individual company data collection procedures. Use of the data is in the public domain and should be compared to all other economic data sources when used in decision-making.

Data and Method of Presentation

The Manufacturing ISM Report On Business is based on data compiled from monthly replies to questions asked of purchasing and supply executives in approximately 400 industrial companies. Membership of the Business Survey Committee is diversified by Standard Industrial Classification (SIC) category, based on each industry's contribution to gross domestic product (GDP). Twenty industries from various U.S. geographical areas are represented on the committee. The 20 manufacturing Standard Industry Classification codes are: Food; Tobacco; Textiles; Apparel; Wood & Wood Products; Furniture; Paper; Printing & Publishing; Chemicals; Petroleum; Rubber & Plastic Products; Leather; Glass, Stone & Aggregate; Primary Metals; Fabricated Metals; Industrial & Commercial Equipment & Computers; Electronic Components & Equipment; Transportation & Equipment; Instruments & Photographic Equipment; and Miscellaneous (a preponderance of jewelry, toys, sporting goods and musical instruments).

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (New Orders, Backlog of Orders, New Export Orders, Imports, Production, Supplier Deliveries, Inventories, Customers' Inventories, Employment and Prices), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher, better and slower for Supplier Deliveries) and the negative economic direction (lower, worse and faster for Supplier Deliveries), and the diffusion index. Responses are raw data and are never changed. The diffusion index includes the percent of positive responses plus one-half of those responding the same (considered positive).

The resulting single index number for those meeting the criteria for seasonal adjustments (PMI, New Orders, Production, Employment, Supplier Deliveries, Inventories and New Export Orders) is then seasonally adjusted to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to non-moveable holidays. All seasonal adjustment factors are supplied by the U.S. Department of Commerce and are subject annually to relatively minor changes when conditions warrant them. The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with varying weights: New Orders – 30%; Production – 25%; Employment – 20%; Supplier Deliveries – 15%; and Inventories – 10%.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. A PMI reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI in excess of 42.0 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.0 percent, it is generally declining. The distance from 50 percent or 42.0 percent is indicative of the strength of the expansion or decline. With some of the indicators within this report, ISM has indicated the departure point between expansion and decline of comparable government series, as determined by regression analysis.

Responses to Buying Policy reflect the percent reporting the current month's leadtime, the approximate weighted number of days ahead for which commitments are made for Production Materials; Capital Expenditures; and Maintenance, Repair and Operating (MRO) Supplies, expressed as hand-to-mouth (five days), 30 days, 60 days, 90 days, six months (180 days), a year or more (360 days), and the weighted average number of days. These responses are raw data, never revised, and not seasonally adjusted since there is no significant seasonal pattern.

The Manufacturing ISM Report On Business is published monthly by the Institute for Supply Management. ISM, established in 1915, is the largest supply management organization in the world as well as one of the most respected. ISM's mission is to lead the supply management profession through its standards of excellence, research, promotional activities and education. This report has been issued by the association since 1931, except for a four-year interruption during World War II.