The Institute for Supply Management (ISM) publishes a monthly Report on Business, which provides key economic data on the manufacturing industry. The data used to compile the report is based on survey respondents from many different sectors within the industry who are asked to rate their organization’s performance based on a comparison with the previous month.
The Purchasing Managers Index (PMI) is the composite index for the manufacturing industry compiled by the ISM, and is based on five sub-categories: new orders, production, employment, supplier deliveries and inventories. The PMI index is utilized to help analyze the state of the economy and predict future growth or contraction.
The ISM considers a PMI index over 50.0 to indicate that the manufacturing environment is expanding. The ISM uses benchmark readings for each of the sub-categories to measure the current month’s index as follows:
New Orders – Index above 52.3 is generally consistent with an increase in the Census Bureau’s series on manufacturing orders.
Production – Index above 51.2 is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
Employment – Index above 50.5 is generally consistent with an increase in the Bureau of Labor Statistics data.
Supplier Deliveries – Index above 50 generally indicates slower deliveries.
Inventories – Index above 42.8 is generally consistent with expansion in the Bureau of Economic Analysis’ figures on overall manufacturing inventories.
Rolling three-month review:
The PMI index in July is fairly flat with the previous month, and just below the 50.0 benchmark, indicating some contraction within the manufacturing industry. This marked only the second time since July 2009 (the first being the previous month) that the PMI index was below 50.0. The new orders index dropped considerably in June, also falling below 50.0, for the first time in over three years. This increased only slightly in July. Production and supplier deliveries remained consistent with the June indices. The employment index dropped over 4% in July, which follows increased national unemployment rates for July. Inventory levels, however, increased 5% over the prior month, perhaps indicating that manufacturers are building inventories in anticipation of increased orders in the coming months.
HSBC, in its Flash PMI press release dated August 23, 2012, reports a China PMI of 47.8, a nine-month low, and down from 49.3 in the previous month. Similar to the ISM report, a PMI index below 50.0 is an indication of contraction within the manufacturing industry. Hongbin Qu, Chief Economist, China & Co-Head of Asian Econonic Research at HSBC indicates that declining orders have reduced the PMI. Uncertainty in the European markets is likely a contributing factor to the reduced Chinese exports.
Last month we noted that there is typically a seasonal decline in manufacturing activity during the summer months, and the July PMI report seems to suggest that we may still be in the midst of it.
For further information on the ISM Report On Business, please use the following link:
For further information from the Federal Reserve Bank, please use the following link:
For further information on the HSBC China Manufacturing PMI compiled by Markit, please use the following link:
Please contact a member of the Schneider Downs Manufacturing Group with any questions you may have.
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