Manufacturers ended the second quarter on a high note. The Institute for Supply Management reported last Monday that its closely-watched PMI Index for manufacturers increased for a third-consecutive month in June to a level of 56 (where a reading above 50 indicates that the manufacturing economy is expanding). This signals that the manufacturing sector is leaving the doldrums that it has been stuck in for the past half year. After three years of solid growth, the manufacturing expansion slowed abruptly in the fourth quarter of 2006 and the first quarter of this year, when the PMI Index averaged just 50.9 over this span.
With a PMI level of 56 consistent with over 4 percent GDP growth, today’s report is an encouraging sign that the worst of the slowdown may be behind us. Especially encouraging for manufacturers is the fact that the ISM’s New Orders Index rose to a level above 60 (60.5) for the first time in sixteen months, pointing toward continued health growth in the months ahead.
While the ISM’s index of new export orders moderated to a level of 56 in June, the overall level of 57.3 for the second quarter was best showing since the first quarter of 2006. This is welcomed news. With the housing downturn still in full swing, a pickup in export growth is critically needed to at-least partially offset the on-going housing recession.
Then on Tuesday, the Commerce Department reported that new manufactured orders in May fell by 0.5 percent from April. While this may seem to conflict with the ISM release on Monday, the slowdown in orders in May should is not too worrying. First of all, the drop in May followed 3 consecutive monthly increases, including a 4 percent rise in March that was the biggest monthly gain in 3 years. This, along with the fact that unfilled orders, which rose by 0.9 percent in May supports the notion that manufacturers are still in recovery mode.
Continuing the positive news, the Institute for Supply Management’s non-manufacturing report showed on Thursday that business activity in outside of the factory sector also improved in June. Increasing to a 14 month high of 60.7, the business activity in the non-manufacturing economy increased for a third-consecutive month last month.
All 14 industries, ranging from construction to retail trade to Health-care, posted growth in June. No industries reported decreased activity from May to June and all reported increasing employment last month. This is clearly a good sign that the broader economy is also coming out of a period of subdued growth.