The Institute for Supply Management’s (ISM) manufacturing purchasing managers’ index (PMI) was up strongly in July, building on the healthy gains seen in June. The headline PMI figure rose from 55.3 in June to 57.1 in July, its highest level since November. After declining sharply in January, sentiment has gradually moved higher each month, with the sector rebounding from winter-related disruptions and slow growth in the first quarter of this year. These findings are largely consistent with other indicators showing manufacturers cautiously optimistic about the next six months.
Production, in particular, appears to have recovered back to the stronger expansionary levels seen in the second half of last year. The index for production increased from 60.0 to 61.2, and it was the third straight month with the measure at 60 or greater. Note that output and sales growth both exceeded 60 for five consecutive months in 2013 (August to December) before that streak ended with weather factors in January. The pace of other components were also higher in July, including new orders (up from 58.9 to 63.4), supplier deliveries (up from 51.9 to 54.1) and employment (up from 52.8 to 58.2). The latter figure hopefully indicates positive news on hiring moving forward.
The sample comments echo the positive news seen in the data, but they also hint of possible weaknesses ahead. A transportation executive said, “Business is still very good and we are very optimistic for the rest of the year.” Yet, others are more restrained in their sales outlook, and world events are noted as possible risks to growth. For instance, a chemical manufacturer added, “Geopolitics still present a considerable risk as well as the European market.” Beyond these points, wage pressures are noted, with a petroleum and coal products respondent citing the need for salary increases “due to market competition and shortages in certain specialty skills.”
Along these lines, the ISM data also show both continued pricing pressures and an easing in export sales growth. The index for raw material costs edged higher (up from 58.0 to 59.5), with this indicator averaging 59.1 through the first seven months of 2014. That indicates an acceleration in input costs over the average of 53.8 seen for all of 2013, and it mirrors other inflation data. Regarding trade, the growth rates for exports (down from 54.5 to 53.0) and imports (down from 57.0 to 52.0) were both lower, and we have seen weaker international sales growth year-to-date in other data, as well.
Chad Moutray is the chief economist, National Association of Manufacturers.