By Ravinder Kapur
The October PMI composite index for manufacturing declined to a level of 50.1 as a result of subdued demand from the energy sector and the strong dollar. Meanwhile, the New Orders Index rose by 2.8 to a level of 52.9 and the production index gained 1.1 to also reach a level of 52.9.
The Institute of Supply Management’s Report on Business says that of 18 manufacturing industries, seven increased business volumes while nine reported a decline. The principal sectors reporting growth were printing, furniture and food, with apparel, leather, primary metals and petroleum and coal products showing contraction.
According to Robert A. Dye, chief economist for Comerica, based on the ISM data, the employment sub-index decreased to 47.6, a statistic that is also reflected in declining payroll employment reported for manufacturing industries over August and September.
In September, the construction sector showed a 14.1% increase over the last year due to growth in the number of multi-family projects. Private residential construction spending reported an increase of 1.9% while multi-family grew by 4.9% for the month.
The Manufacturing ISM Report on Business has been published monthly since 1931, except for a four-year interruption during World War II. The PMI, a composite index combines data on new orders, production, employment, and supplier deliveries.
Although the PMI has declined for the last four months, its current level of 50.1 still indicates growth. A PMI above 43.1 reflects an expansion of the economy with the October PMI signaling growth for the 77th consecutive month in the overall economy and for the 34th consecutive month for the manufacturing sector as a whole.
Why should commercial lenders care?
Bradley J. Holcomb, chair of the Institute for Supply Management Manufacturing Business Survey Committee says, “The past relationship between the PMI and the overall economy indicates that the average PMI for January through October (52%) corresponds to a 2.8% increase in real gross domestic product on an annualized basis.
“In addition, if the PMI for October (50.1%) is annualized, it corresponds to a 2.2% increase in GDP annually,” he stated.
Manufacturing volumes and employment are hard statistics reflecting fundamental economic performance. If goods aren’t produced, they can’t be sold. These manufacturing industries react to real or perceived demand for the goods–or lack of demand–so when they produce, it’s with the idea that there is either a hard order or expectation of one.
Lenders can track this data a one of the leading indicators of growth or lack of it, and set there own expectations for managing balance sheets and the demands of their clients, many of whom may directly interface with the manufacturing sector.
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