ISM Index: Slight Improvement but Manufacturing Activity Continues to Fall
Following is an analysis from Don Norman, Ph.D., director of economic studies at the MAPI Foundation, the research affiliate of the Manufacturers Alliance for Productivity and Innovation, regarding the January 2016 Institute for Supply Management (ISM) report.
“The Institute for Supply Management (ISM) reported that its monthly index, a short-term leading indicator of U.S. manufacturing growth, rose from 48.0 in December to 48.2 in January,” noted Norman. “Despite this increase, the index remains below 50, indicating that manufacturing activity continues to fall. The slight improvement in the index indicates the rate of contraction has slowed. The index for manufacturing employment fell from 48.0 in December to 45.9 in January while the exports index fell sharply from 51.0 to 47.0.
“There was some better news,” he explained. “The production index rose from 49.9 in December to 50.2 in January. In addition, the new orders index jumped from 48.8 to 51.5. Because these indexes are above 50, they indicate that production and new orders are growing. The backlog of orders index also rose two percentage points, although at 43.0 it remains at a very low level.
“The findings of this month’s ISM report are consistent with recent Census Bureau data on factory orders and the Federal Reserve Board’s latest index of manufacturing activity. The drivers behind the slowdown in manufacturing activity are easy to identify,” Norman said. “The slowdown in China’s economic growth and the rise in the value of the dollar over the past year are largely responsible for the decline in exports. The dramatic fall in the price of oil, coupled with the low price of natural gas, has reduced oil and gas development activity and thus the demand for manufactured goods required for such development. Given how the manufacturing sector has been buffeted by these negative events, it encouraging that manufacturing sector activity hasn’t contracted more sharply than it has. Still, it looks as if the first quarter of 2016 will be as challenging for manufacturers as were the first quarters of 2014 and 2015.”