Fundamental Analysis

ISM Manufacturing: Solid Gains, Solid Growth Ahead


Overall, the ISM purchasing managers index came in at 58.2 with solid gains once again in production, employment and orders. Input prices continue to show upward pressure and restraint on profits.

Despite Modest Retreat in Headline, Production Remains Strong

The ISM manufacturing index slowed ever so slightly in November to 58.2 from 58.7 (top graph). The composite index is coming off a cycle high of 60.8 in September and with a six-month average of 58.4, the index continues to signal firmness in the manufacturing sector. For the year ahead, we expect quarterly GDP gains of 2 percent or greater.

Subcomponent details are encouraging. The production index, for example, has been above 60 since June and came in at 63.9 in today's report for November; that's the highest reading since March 2011. Fourteen industries reported gains in production including paper, furniture, plastics & rubber and machinery.

As for employment, that index came in at 59.7, above its six-month average of 58.7 with 11 of 18 industries reporting employment growth. This is a plus for the employment numbers to be reported next Friday. Industries reporting gains in employment include textile mills, machinery, computer products and paper. We anticipate that job gains in the first half of 2018 will be in line with the 2017 pace and thereby support continued consumer income and spending gains.

New Orders—Signal of Growth Ahead

New orders came in at 64.0 in November, above the 63.4 for October and the 62.7 six-month average. This is a good signal of continued growth ahead (middle graph). Fourteen of 18 industries showed growth in orders, including electrical equipment, appliances, paper, furniture, plastics and machinery. The gains in new orders are solid and broadly based. Foreign sources of demand contributed to the overall strength in orders as new export orders came in at 56.0 in November, which was in-line with the six-month average. Eight industries reported growth in new export orders. The "backlog of orders" subcomponent came in at 55.0 in November. Rising backlogs are another forward indication that manufacturing production will continue ahead.

Input Cost Pressures Continue to Increase

Rising commodity prices have led to some cost pressures in the nation's factory sector and this is reflected in the 65.5 reading on prices paid (bottom graph). Fifteen of the 18 industries surveyed indicated paying higher prices for their inputs including plastics, textile mills, machinery, food & beverage and paper, curbing profit growth in these industries.

Commodities up in price included aluminum (13 straight months), corrugated boxes (14 straight months), caustic soda (5 months) and hot rolled steel (12 months). The rise in the ISM prices index does intimate upward pressure on core finished goods in the producer price index.

Author: Wells Fargo SecuritiesWebsite:
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