January manufacturing output rebounds, but future growth could be limited, says ISM

Following a decline to finish 2018, manufacturing output kicked off 2019 on a growth path, according to the monthly manufacturing Report on Business, which was released today by the Institute for Supply Management (ISM). 

The report’s key metric, the PMI, increased 2.3% to 56.6 (a reading of 50 or higher indicates growth). This follows a 5.2% decline to 54.3 in December. The index has now grown for 29 consecutive months, with the overall economy now having grown for 117 consecutive months.  

This January increase continues a pattern of PMI inconsistency in recent months, with September and October posting declines, followed by a gain in November and a decline in December.   The January PMI is 1.9% below the 12-month average of 58.5.

ISM reported that 14 of 18 manufacturing sectors reported growth in January, including:  Textile Mills; Computer & Electronic Products; Plastics & Rubber Products; Miscellaneous Manufacturing; Furniture & Related Products; Printing & Related Support Activities; Primary Metals; Chemical Products; Transportation Equipment; Machinery; Fabricated Metal Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; and Electrical Equipment, Appliances & Components, with Nonmetallic Mineral Products the lone sector reporting contraction.

Most of the report’s key metrics, including the PMI, saw gains in January.

New orders, which are commonly referred to as the engine that drives manufacturing, rose 6.9% to 58.2, growing for the 37th consecutive month, and helping to quell December’s steep 11% decline to 51.1, which was the lowest level for new orders going back to August 2016, when it came in at 50.5. ISM reported that 11 of 18 manufacturing sectors reported new orders gains.

Production also saw a strong rebound from December, up 6.4% to 60.5, growing for the 29th consecutive month, with 14 sectors reporting growth. The 6.4% gain helped to almost entirely erase December’s 6.3% decline.  Employment dipped 0.5% to 55.5, while still growing for the 28th consecutive month. Supplier deliveries, at 56.2 (a reading above 50 indicates contraction) decreased at a slower rate for the 35th month in a row. Inventories headed up 1.6% to 52.8, while still growing for the 13th consecutive month.

Comments submitted by ISM members for the report were mixed, depending on manufacturing sector.

A computer & electronics sector respondent pointed to a steady supply and production environment, while a chemical products respondent cited concerns about oil prices fueling questions of how strong the economy will be for the first half of 2019. A transportation equipment respondent indicated that while overall business conditions are still good, margins are being squeezed. And a furniture & related products respondent said incoming orders have been steady, despite starting to see signs of slowing going into February and March.

“The 56.6 PMI is a good number, considering were things were in December,” said Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee. “I would be surprised if it gets much further north of that, unless the inventory count shoots way up or we had some catastrophic event that disrupts the supply chain and the supplier delivery number jumps way up.”

Fiore said that the 6.9% jump in new orders is a “better rebound” compared to the last time that the metric was coming off of a major decline, with new orders relating to technology serving as a major driver for the rebound. And he added that a decline in technology-related orders were a major factor behind the decline in new orders from November to December.

From a PMI number perspective, Fiore said that he is hopeful the PMI stays between 55 and 57 in 2019, adding that he is not optimistic it will be north of 58.

“That would be fine,” he said. “2019 GDP is forecasted by the Federal Government and CBO to be 2.3%, off of 3.1% for 2018, so 55-to-57 is the range if demand and production are good, as well as consumption, including employment and production. The big story is around the supplier input side, coupled with pricing contracting [down 5.3% to 49.6]. We had a further relaxation in the supplier delivery number, meaning delivery was faster, a modest inventory gain, but a gain nonetheless. That raises the question of are supplier deliveries faster because demand is falling off?”

Meanwhile, even with tariffs still in place, commodity prices are down, as well as fuel prices, and the fundamentals going on at different levels of the supply chain are indicating that “more sluggish growth” could be in store for 2019, especially when compared to 2018, Fiore explained.