Of the mountains of economic data sliced and diced each month, very little has the durability, credibility, or market-moving influence of the Institute of Supply Management's (ISM) Manufacturing Report on Business. Published continuously since 1931—save for the four years during World War II—the monthly report dissects trends across 18 industries through 11 indexes. Its headline number—the Purchasing Managers Index (PMI)—is closely tracked by economists, policymakers, and investors alike.
Since 1996, the report's production has been overseen by Norbert J. Ore, who serves in a volunteer role as chair of ISM's Manufacturing Business Survey Committee. Ore recently retired from Georgia Pacific Corp. after a long career in supply management. Before joining Georgia Pacific, where he was group director of strategic sourcing and procurement, he held supply chain leadership positions at Sonoco Products Co. and Chesapeake Corp. That background has served him well in his current role as analyst: Ore's comments in the communiqué that accompanies each ISM report are as closely scrutinized as the data itself.
Ore spoke with Senior Editor Mark B. Solomon in early October about the report—its roots, its relevance, and what it tells us about the state of the U.S. economy.
Q: The ISM manufacturing report was established in 1931, during the depths of the Great Depression. How did the report get started, and did the economic conditions of the day play any role in its creation?
A: The Manufacturing Report on Business was established at the request of President Hoover to meet a need for more current information on the economic conditions during the period. As you might imagine, the quality, timeliness, and amount of economic data available to policymakers was less than sufficient in those days. The ISM Manufacturing Report on Business provided timely data that revealed the level of activity in an important and growing sector of the economy.
Q: We are conducting this interview in early October, just days after ISM released its September report—the first in nearly 18 months to show an appreciable slowing in manufacturing activity. What does the September report tell you about the balance of the year and the early part of 2011?
A: September was the 14th consecutive month of growth for U.S. manufacturing based on the PMI at 54.4 percent. This represents an 8.8-percent month-over-month improvement and signals that manufacturing continues to grow faster than the rest of the economy. The driver for manufacturing to this point is a somewhat typical business cycle recovery as it has sized employment, inventories, investment, and capacity to levels that meet current demand. But that phase is now behind us, and the manufacturing recovery is slowing and will remain slow unless there is an improvement in consumer spending and business investment that fuels the next stage.
While we will see continuing growth in Q4, it doesn't appear to be sufficient for significant job creation. The United States has lost 2 million manufacturing jobs; they are difficult to replace, and it can't be done quickly. Prospects for 2011 may be better, but it will be relative to how strong the recoveries are in autos and housing as they drive manufacturing in a number of other industries, such as plastics and rubber products, primary metals, fabricated metals, and textiles.
Q: The National Bureau of Economic Research (NBER) said recently that the current recession ended in June 2009. And yet there are lingering concerns about a so-called "double dip." Based on what you're hearing from purchasing and supply managers, how do you come down on these issues? Is the economy in more of a mid-cycle correction than a second trough?
A: The NBER determination is an attempt to place beginning and ending dates on the recession. From a macroeconomic standpoint, it is good to have one group that everyone looks to make the determination. The ISM data is more about microeconomics, as we are looking at the 18 manufacturing industries that comprise 12 percent of GDP. A number of industries, including printing, textiles, wood products, and furniture, are still in a recession. Many businesses are still feeling the effects of this downturn. The recovery has been kinder to medium to large businesses than it has been to small ones. The point is that we are not totally out of this, and the employment statistics show it.
At the same time, we have a very resilient economic system, and left to its natural strength, it solves most of its problems on its own. The current trend toward slower growth in new orders and production may continue into next year. As I stated previously, we need a significant improvement in consumer and business confidence to drive the overall economy. That would be 3.5 percent or higher growth in GDP. Will there be a double dip? There is nothing in the current data that would lead to that conclusion.
Q: We began hearing from transportation folks several months back that while shipping remained robust, activity at the front end of the supply chain—new orders—had begun to tail off. Does the September report bear witness to that, and will this softening trend be with us for a while?
A: Yes, the rate of growth in new orders began slowing in June, and the August-September month-over-month improvement was only 2.2 percent, compared to 30 percent back in June. But that is not atypical of a business cycle recovery. The transportation sector is a good indicator because it is one of the first to see improved activity. ISM measures customers' inventory levels, and they appear to be too low at this time. So we may see some improvement if customer confidence improves.
Q: ISM peppers the report with anecdotes from managers across multiple industries. How relevant are the anecdotes, relative to the actual data, in shaping your analysis of trends?
A: The anecdotes are an attempt to share some of what is on the minds of supply managers, who are out there on the front lines. We try to select quotes that are indicative of the story that is in the month's data.
But the trends in the data are the most important. I have found that the trends tell the ultimate story. I have learned to trust the trends in the ISM data. They are quite reliable and should be one of a number of data sources decision makers use in determining their strategies.
Q: The September report showed a sizable jump in the prices-paid component, which continues a months-long upward trend. The increase in that component has also coincided with a slowing in supplier deliveries. Will an economic slowdown cause the pace of deliveries to pick up, and thus lead to a moderation in prices? Or is there an inflation threat lurking in our future?
A: The prices-paid component reflects the prices manufacturers pay for their inputs and is the most volatile of the indexes. It is a good source of information on commodity prices. While the index was higher in September, the number of commodities up in price needs to be greater before it would be of concern. Sellers had significant pricing power during the first half of this year, but with the slowing in growth, their pricing power has weakened. The comparison of the speed of deliveries to prices is quite valid and one of the indicators that can be used to determine if deliveries have slowed sufficiently to signal that demand is strong enough to support higher prices.
With regard to inflation, there are no signs in the ISM data at this time. Many believe, however, that inflation is a monetary phenomenon, so while it may not be an issue in the near term; it may be a challenge in the future.
Q: Our readers are mostly logisticians. Is there a particular index they should key on as a harbinger of future activity?
A: I would recommend they look at ISM's New Orders and Customers' Inventories indexes in particular. The New Orders Index is considered a leading indicator and provides excellent insight into the level of activity that logisticians might expect in the coming 45 to 90 days as manufacturers see their order books rise or fall. The Customers' Inventories Index is coincident and indicates the inventory level at the point of demand. When customers' inventories are too high, it will result in less activity in other links in the supply chain. Conversely, a reading that is too low, as we have presently, indicates customers are delaying restocking or are unable to restock fast enough.
Editor's note: Mr. Ore's comments refer to the September ISM report, which was current at the time of the interview. The latest report is available at ISM's website.
