We've reached the half way point of 2019, and what a six months it has been.
The dominant supply chain theme of 1H 2019 has clearly been the trade wars, largely between the US and China, which has really started to impact supply chain decisions, as SCDigest has reported. (See Trade Wars and the Supply Chain Part 2.)
Supply Chain Digest Says... |
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The Institute for Supply Management (ISM) is most known for its monthly Purchasing Managers Index (PMI), which tracks the health of US manufacturing on a monthly basis.
But the full “ISM Report on Business,” released on the first workday of each month, contains many other measures that collectively provide deep insight into the overall state of the US economy.
In fact, the well-known PMI, for which a score of above 50 indicates manufacturing expansion, and below 50 US manufacturing contraction, is not measured directly, but rather is a composite of five other indices ISM tracks: New Orders, Production, Employment, Supplier Deliveries, and Inventories.
With the report for June released earlier this week and the end of the first half of the year, it's an opportune time to look at several of the economic measures.
The PMI itself has been falling in recent months – but still showing manufacturing in positive territory. In June, the PMI fell four-tenths of a percent to 51.7. The average for the past 12 months as been 56.0, with a high of 60.8 in August of 2018, and the June level a 12-month low.
June actually represented the 34th straight month of US manufacturing expansion. Also, ISM notes that a PMI score of more than just 42.9 indicates overall US economic expansion, even if the manufacturing sector is down a bit.
US PMI Levels over Past 12 Months
The ISM New Orders index is also key, as it is a predictor of future manufacturing. In June, that measure fell 2.7 percentage points to a level of 50, indicating a middle point between expansion and contraction.
That broke a string of 41 consecutive months of rising new orders. Customer demand did not expand for the first time since December 2015, when the index registered 49.6.
Better news on the production front, with the index up almost 3 percentage points to 54.1, offering some counter to other signs of economic slowing. That was also up for the 34th consecutive month. The report notes that an index above 51.7 percent, over time, is generally consistent with an increase in the Federal Reserve Board's monthly Industrial Production index.
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The Inventory index for June fell almost 2 percentage points to 49.1, meaning inventories levels are slightly declining.
That means the index contracted for the first time since December 2017, when it registered 48.5. ISM says inventories were depleted relative to production, due to production-output strength and despite suppliers delivering at a slower rate. Many respondents noted that they continue to watch inventories closely to align with softening demand.
Perhaps most telling of all, the Prices index, which tracks what companies are paying for materials and components, fell more than 4 percentage points to 47.9, meaning prices are falling.
In recent months, the Prices index has been trending down, likely the result of slowing demand.
Imports for June were flat, following two months of modest decline, as the trade wars seem to be having some effect.
In total, the ISM data tells us the economy and manufacturing sector are expanding, but at a reduced rate. The Atlanta Federal Reserve this week maintained its forecast for 1.5% real US GDP growth for Q2, down from the pace in Q1 but hardly recessionary.
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