ISM: Manufacturing cools; PMI declines 2.2 points to 53.8

The report was issued August 1 by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee.

"Following a strong second quarter, the manufacturing sector moderated somewhat this past month," said Ore. "In July, manufacturing expanded at its slowest pace in the last four months, but continuing strength in New Orders and Production indicate that third quarter performance should still be quite good. Upward pricing pressures now in their seventh month continue to be a major concern for supply managers."

TOP PERFORMING INDUSTRIES

The 10 industries reporting growth in July — listed in order — are: Wood Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Paper Products; Textile Mills; Chemical Products; Computer & Electronic Products; Nonmetallic Mineral Products; and Primary Metals.

WHAT RESPONDENTS ARE SAYING ...

• "Price of nickel has finally started the decline to possible normal ranges." (Chemical Products)
• "Shortages of electronic components in the military market severely impacting customer deliveries." (Computer & Electronic Products)
• "Profit margins shrinking as a result of energy, labor and commodity price increases." (Food, Beverage & Tobacco Products)
• "Market going to trough at the moment, but it appears to be near the end." (Transportation Equipment)
• "Oil still driving petrochemical prices up." (Plastics & Rubber Products)

*Number of months moving in current direction

COMMODITIES REPORTED UP/DOWN IN PRICE and IN SHORT SUPPLY

Commodities Up in Price

Aluminum (8); Caustic Soda; Copper Based Products (4); Low Density Polyethylene; Soybean Oil (2); Stainless Steel (7); and Wheat.

Commodities Down in Price

Gasoline; Natural Gas; Nickel; and Steel — Flat Rolled.

Commodities in Short Supply

No commodities are reported in short supply.

Note: The number of consecutive months the commodity is listed is indicated after each item.

JULY 2007 MANUFACTURING INDEX SUMMARIES

PMI

Manufacturing growth slowed in July as the PMI registered 53.8 percent, a decrease of 2.2 percentage points when compared to June's reading of 56 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 41.9 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the 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 PMI average for January through July (53.1 percent) corresponds to a 3.5 percent increase in real gross domestic product (GDP) annually. In addition, if the PMI for July (53.8 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually."

THE LAST 12 MONTHS

New Orders

ISM's New Orders Index declined to 57.5 percent in July. The index is 2.8 percentage points lower than the 60.3 percent reported in June. A New Orders Index above 49.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars). Nine industries reported increases during July: Wood Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Textile Mills; Miscellaneous Manufacturing; Chemical Products; Machinery; Primary Metals; and Computer & Electronic Products.

Production

ISM's Production Index registered 55.6 percent in July, which is 7.3 percentage points lower than the 62.9 percent reported in June. July is the sixth consecutive month of production growth for manufacturers. An index above 49.8 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures. Of the industries reporting in July, nine registered growth: Wood Products; Paper Products; Furniture & Related Products; Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Primary Metals; Miscellaneous Manufacturing; and Chemical Products.

Employment

ISM's Employment Index registered 50.2 percent in July, which is a decrease of 0.9 percentage point when compared to June's reading of 51.1 percent. An Employment Index above 49.2 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment. The seven industries reporting growth in employment during July are: Textile Mills; Paper Products; Computer & Electronic Products; Furniture & Related Products; Food, Beverage & Tobacco Products; Chemical Products; and Miscellaneous Manufacturing.

Supplier Deliveries

The delivery performance of suppliers to manufacturing organizations was slower in July. ISM's Supplier Deliveries Index registered 52 percent in July, a 2.3 percentage point increase when compared to June's reading of 49.7 percent. This reverses a one-month contraction in the index. A reading above 50 percent indicates slower deliveries. The seven industries reporting slower supplier deliveries in July are: Textile Mills; Wood Products; Miscellaneous Manufacturing; Computer & Electronic Products; Food, Beverage & Tobacco Products; Machinery; and Transportation Equipment.

Inventories

Manufacturers' inventories registered 48.5 percent in July, which is 3.2 percentage points higher than June's reading of 45.3 percent. This is the 12th consecutive month of inventory liquidation. An Inventories Index greater than 42.4 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 five industries reporting higher inventories in July are: Textile Mills; Wood Products; Furniture & Related Products; Transportation Equipment; and Plastics & Rubber Products.

Customers' Inventories*

The ISM Customers' Inventories Index registered 51 percent in July, which is 4 percentage points higher than the 47 percent reported in June. The index indicates that respondents believe their customers have more than sufficient inventories on hand (inventories are too high) at this time. Five industries reported higher customers' inventories during July: Textile Mills; Nonmetallic Mineral Products; Fabricated Metal Products; Furniture & Related Products; and Plastics & Rubber Products.

Prices*

In July, the ISM Prices Index registered 65 percent, indicating manufacturers are paying higher prices on average when compared to June. While 38 percent of respondents reported paying higher prices and 8 percent reported paying lower prices, 54 percent of supply executives reported paying the same prices as the preceding month. A Prices Index above 47.2 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices. In July, 13 industries reported paying higher prices: Printing & Related Support Activities; Food, Beverage & Tobacco Products; Textile Mills; Wood Products; Paper Products; Plastics & Rubber Products; Chemical Products; Machinery; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Fabricated Metal Products; Transportation Equipment; and Furniture & Related Products.

Backlog of Orders*

ISM's Backlog of Orders Index registered 52 percent in July, 1.5 percentage points lower than the 53.5 percent reported in June. Of the 86 percent of respondents who reported their backlog of orders, 23 percent reported greater backlogs, 19 percent reported smaller backlogs, and 58 percent reported no change from June. The six industries reporting an increase in order backlogs in July are: Wood Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Chemical Products; Primary Metals; and Computer & Electronic Products.

New Export Orders*

ISM's New Export Orders Index registered 56.5 percent in July, an increase of 0.5 percentage point when compared to June's index of 56 percent. This is the 56th consecutive month of growth in export orders. The 10 industries reporting growth in new export orders in July are: Wood Products; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Primary Metals; Food, Beverage & Tobacco Products; Machinery; Chemical Products; Transportation Equipment; and Fabricated Metal Products.

Imports*

Imports of materials by manufacturers grew during July as the Imports Index registered 54.5 percent, the same as reported in June. This is the 67th consecutive month of growth in import orders. The nine industries reporting growth in import activity for July are: Nonmetallic Mineral Products; Wood Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Miscellaneous Manufacturing; Fabricated Metal Products; Transportation Equipment; Chemical Products; and Computer & Electronic Products.

* The Backlog of Orders, Prices, Customers' Inventories, Imports and New Export Orders Indexes do not meet the accepted criteria for seasonal adjustments.

Buying Policy

Average commitment leadtime for Capital Expenditures is unchanged at 115 days. Average leadtime for Production Materials increased 6 days to 51 days. Average leadtime for Maintenance, Repair and Operating (MRO) Supplies decreased 1 day to 22 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 purchasing and supply executives nationwide. Membership of the Manufacturing Business Survey Committee is diversified by NAICS, based on each industry's contribution to gross domestic product (GDP). Manufacturing Business Survey Committee responses are divided into the following NAICS code categories: Food, Beverage & Tobacco Products; Textile Mills; Apparel, Leather & Allied Products; Wood Products; Paper Products; Printing & Related Support Activities; Petroleum & Coal Products; Chemical Products; Plastics & Rubber Products; Nonmetallic Mineral Products; Primary Metals; Fabricated Metal Products; Machinery; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Furniture & Related Products; and Miscellaneous Manufacturing (products such as medical equipment and supplies, jewelry, sporting goods, toys and office supplies).

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 and Inventories) 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 41.9 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 41.9 percent, it is generally declining. The distance from 50 percent or 41.9 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. The Institute for Supply Management™, 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.