The U.S. manufacturing industry is entering the third quarter on a positive note, according to the Institute of Supply Management’s monthly business index. The ISM’s leading indicator, the purchasing manager’s index (PMI), increased in August to 55.7 percent from 55.4 percent the prior month. This is the third consecutive month of manufacturing expansion and the highest reading of the year, according to by Bradley J. Holcomb, chair of the ISM’s Manufacturing Business Survey Committee.
A PMI reading above 50 percent indicates that the manufacturing economy is expanding; below 50 percent indicates that it is contracting.
Fifteen of the 18 manufacturing sectors the ISM tracks grew in August. “It’s a very positive and well-balanced report,” Holcomb said. “August is the highest level we’ve seen this year and we have two strong months of growth as we enter the third quarter. That bodes well for the second half of the year.”
The new orders index also reached a high in August, increasing by 4.9 percentage points to 63.2 percent; while the production index decreased by 2.6 percentage points to 62.4 percent. “Production did slip, but from a remarkable high of 65 which we haven’t seen in years,” Holcomb said. “And it’s new orders that really drives the overall growth.”
New orders are part of the reason customer inventories – at 42.5 percent. -- have reached their lowest point since 2011. “Customer inventories are about as low as you want them to go,” Holcomb said. “But when they are that low that means customers will have a need to restock. This, in turn generates new orders.”
Overall optimism is being tempered, however, by anecdotal information within industry segments. Electronics, for example, continues to expand, but military electronics has stagnated, industry participants said. “The numbers are solid but the comments are somewhat cautionary and are a reminder that we are in a slow growth recovery,” Holcomb said. “We’ve seen within sectors that not everybody is doing well. In electronics, consumer is pulling the numbers up although military spending is down. I like this because it is a reminder to us that everything isn’t rosy right now and many sectors are still awaiting a recovery.”
The ISM’s employment index registered 53.3 percent in August -- 1.1 percentage points lower than the 54.4 percent reported in July – also signaling caution, Holcomb added.