Manufacturing showed further signs of shaking off its winter doldrums as the Institute for Supply Management’s manufacturing index for April rose 1.2% to 54.9%. The increase beat consensus forecasts of 54.2%. A reading above 50 for the survey of supply chain managers indicates growth in factories.
The April increase was the 11th consecutive month of growth for manufacturing while the overall economy has grown for 59 months. And better days may be ahead, according to one fabricated metals product manufacturer responding to the ISM survey:
"Winter weather has slowed order intake but not inquiries. We think there is pent-up demand waiting for the weather to break."
Growth in manufacturing was virtually across the board. Of the 18 manufacturing industries, only nonmetallic mineral products failed to register a gain in April. Still, analysts such as Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), said the April figures pointed more to steady growth than a shift in momentum:
“While the slow and steady climb since the dramatic January fall is encouraging, it remains measurably below the levels seen in August through December of 2013. Inventory and weather-related volatility clearly played a part in the January swoon but the late 2013 data clearly overstated the underlying growth performance of a factory sector that, remarkably, has yet to regain all of the output lost in the Great Recession."
ISM's new orders index registered 55.1% in April, the same percentage as reported in March. The production index registered 55.7% in April, a decrease of 0.2 percentage point when compared to the 55.9% reported in March. MAPI’s Waldman noted:
“The new orders component was unchanged at a healthy 55.1%, while the production component saw a very modest 0.2 percentage point fall to a still moderately strong 55.7%. The fact that customers’ inventories remained too low and the backlog of orders component remained well in growth territory suggests that moderate output gains are likely in U.S. manufacturing through the balance of 2014 and into 2015.”
The ISM report showed a strong gain in its employment index, from 51.1% in March to 54.7% in April. Thomas Feltmate, an economist with TD Economics, noted:
“The strong gains in this morning's employment sub-component are particularly encouraging. While hiring in the manufacturing sector slowed considerably in the first quarter of 2014 (26k from 60k in 13Q4), a gradual unwinding of inventories in combination with the recent ramp-up in new exports orders bodes well for future employment growth in the manufacturing sector.”
While growth in hiring points to a stronger manufacturing sector, Russ Rasmus, a managing director with Accenture Strategy, said it also brings continuing challenges in finding employees with the skills to operate more advanced manufacturing equipment.
“As these manufacturers are advancing their operating models and putting more digital capabilities into their manufacturing environments, it is getting tougher to find the right skill mix in resources to fulfill these roles. That will be a continuing trend.”
While manufacturers are picking up the pace of production, ISM's customers' inventories index registered 42% in April, the same percentage as reported in March.
“The April and March readings of 42% are the lowest since May 2011 when the customers' inventories index registered 39.5%. Customers' inventories have registered at or below 50% for 61 consecutive months. A reading below 50% indicates customers' inventories are considered too low.”
ISM's new export orders index registered 57% in April, a gain of 1.5 percentage points higher from the 55.5% reported in March. April's reading reflects 17 months of growth in the level of exports. Still, exports present a mixed picture as one transportation equipment producer told ISM:
“U.S. remains stable, Asia is increasing in sales dramatically and Europe remains soft."
ISM's imports index registered 58% in April, 3.5 percentage points higher than the 54.5% reported in March. April’s reading represents 15 consecutive months of growth in imports.
The ISM April findings continue a pattern showing the U.S. continuing a recovery that is solid but far from inspiring. For example, orders for durable goods increased 2.6% in March. The improvement was broader than the February increase of 2.1%, which was focused in the aerospace sector. Even with the good news, IHS pointed out:
“Although March ended the quarter well, core capital goods orders for the first quarter were only 1.4% higher than a year earlier, and shipments only 1.6% higher. General sluggishness in the wider economy and less-than-stellar growth overseas suggest decent but uninspiring gains to come.”
Economists also worry that the recovery will remain constrained as long as consumers don’t see more money in their pockets. Lindsey M. Piegza, chief economist for Sterne Agee, warned:
“[W]hile there has been ground regained from the January low, on a relative basis, looking at inflation adjusted spending, the consumer remains restricted in their ability to finance increased spending amid stagnant wage growth. The longer-term trend continues to show downward momentum, suggesting the ‘rebound’ may be short-lived.”
