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Manufacturing Index Trends Downward

The month of August has the distinction of being the worst month –so far — for manufacturing since July 2009. Today, the Institute of Supply Management (ISM) reported manufacturing contracted for the third consecutive month in August, reaching an index level of 49.6 percent. (A level over 50 indicates growth; under 50 means contraction.) August’s index fell 0.2 percent from July’s level of 49.8 percent.

Comments from the ISM’s panel, made up of purchasing executives, generally reflect a slowdown in orders and demand, with continuing concern over the uncertain state of global economies. Of the 18 industries the ISM tracks, eight reported contraction in August, including Computer and Electronic Products; and Electrical Equipment, Appliances, and Components.

The forward-looking New Orders Index registered 47.1 percent, a decrease of 0.9 percentage point from July, indicating contraction in new orders for the third consecutive month. Overall, the indicators for manufacturing are discouraging: Inventories increased to 53 percent in August, which is 4 percentage points higher than the 49 percent reported in July.

“This month's reading indicates that respondents are reporting inventories are growing for the first time since September 2011,” according to the ISM. Computers and electronics were among the few categories that reported a decrease in inventories for the month.

Although manufacturing-related stocks were trading lower today, analysts are being temperate about the downward trend. According to The Wall Street Journal:

    “We’re probably treading water right now,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “The ISM is mainly a measure of sentiment, and

[August’s reading] isn’t quite enough to suggest the manufacturing sector is contracting in a meaningful way. If equity prices continue to generally trend higher, and Europe continues to muddle through, the ISM is likely to rise in response to those factors.”

Curiously, although demand seems lower, prices are increasing. The overall Prices Index registered 54 percent in August, which is an increase of 14.5 percentage points compared to the July reading of 39.5 percent, ISM reports:

    This is the first month the index has reflected an increase in the price of raw materials since April 2012 when the Prices Index registered 61 percent. This is also the largest month-over-month increase since September 2005, when the index increased 15.5 percentage points from August 2005.

6 comments on “Manufacturing Index Trends Downward

  1. bolaji ojo
    September 5, 2012

    The pricing numbers reported shouldn't surprise anyone. Prices cannot continue to decline even as manufacturing costs (labor for example in China) keep going up. At some point, manufacturers will have to draw a line in the sand and refuse to be moved. If margins are sliding into negative territory, companies will refuse to budge or they may even start raising prices slowly despite slowing demand. Plus, pricing doesn't always catch up with demand that quickly.

    Prices in the electronics components industry have been tredning downward for a while except in certain markets (hard disk drive, for example). Will buyers continue to enjoy lower pricing at the expense of manufacturers' profitability? The best practices OEMs know and understand that pushing their suppliers into negative territory can be problematic in the longer run. Such suppliers either get out of those markets or wait for payback time when demand outstrips supply.

  2. Barbara Jorgensen
    September 5, 2012

    @Bolaji: agreed–in components, there's not a lot of room for price erosion. I did find it curious, though, that raw materials prices are increasing as overall capacity is decreasing. One explanation could be some materials (oil is included) are also priced based on production as well as demand; the other could be the lag you mentioned.

  3. ahdand
    September 5, 2012

    Well Barbara dont you think that the main cause for this is poor planing ? I feel poor plannng plus economic crisis has made things worse right now. We cannot blame only the economy since the planning is also not upto the mark, since if we plan correctly, then we would have been able to figure out atleast a bit on how tough it will be in the future and what sort of back-up plans we should have to face them.

  4. Barbara Jorgensen
    September 5, 2012

    @Nimantha: good question. I don't think planning is the culprit this time, though. We didn't see a lot of capacity added between the last recession and the present. I think this is purely economy driven. As one participant said in the report: companies are holding on to their money. I also think people expected things to recover in a slow but upward trend (I think “hockey stick” is the term) but it is looking more u or v-shaped.

  5. ahdand
    September 6, 2012

    Barbara: I think planning do play a role here becasue if they have recorgnized what the situation is going to be when it comes for economy trends, then they should have been able to face the current scenario in a much more practical manner.

  6. ahdand
    September 19, 2012

    Well Barbara true but if we had the oppertunity to know or get an idea about how the future will hold then wouldnt it be better for all of us ? I think we could have achived that if we had properly planned our work.

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