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Manufacturing Turbulence… Now What?

If you're a manufacturing industry pundit, maybe you can help me make sense of the yoyo that is the monthly Purchasing Managers Index, the PMI, for short.

I understand the metric well enough. I've been watching it for years while covering the electronics industry, and, like many others, I get a little jittery when the calendar flips to a new month. It's the bellwether of how well the manufacturing sector is faring.

Still, though, I can't help but wonder: Is this the closest thing we have to a crystal ball, using previous months' activity to foreshadow what's likely to come in the next few months? Or is it one of the few ways we can make sense of the manufacturing and economic climate via numbers that show some predetermined level of growth or contraction?

More broadly, what I never quite understood is how purchasers or supply chain managers change or adjust their existing sourcing or purchasing plans when these numbers come out. And do constantly fluctuating growth/contraction cycles influence manufacturing investment strategies? For example, if the PMI registers growth for five months, is that a sign for manufacturers to run more factory lines? Or do a few months of contraction signal time to give temporary workers pink slips?

Take November's mixed bag of global PMI results. How do we make heads or tails of this?

The Institute for Supply Management reported this week that “economic activity in the manufacturing sector contracted in November, following two months of modest expansion.” The organization said last month's numbers indicated contraction in manufacturing for the fourth time in the last six months, and The Wall Street Journal said the 49.5 percent for November is the PMI's lowest level in three years. But if 50 percent is the manufacturing economy's break-even line, should we be too nervous when it contracts a half-percentage point? It's not as if it dropped to 35 percent, as the global PMI did in the middle of 2008 when the financial crisis forced a hard and fast brake on production. (You can find historical global manufacturing PMI info here.)

Of course, this is filtered through the more positive news that the overall US “economy grew for the 42nd consecutive month,” according to the ISM. The New Orders Index came in at 50.3 percent, a decrease from October but also indicating growth in new orders for the third consecutive month, the report said. The Production Index was up as well to 53.7 percent, a good sign for two consecutive months.

Worldwide, the JPMorgan Global Manufacturing PMI — a composite index produced by JPMorgan and Markit in association with ISM and IFPSM — rose to a five-month high, hitting 49.7, just “marginally below the neutral 50.0 mark.”

The much-watched China PMI increased for the first time in four months, and Brazil, India, Indonesia, Mexico, Russia, Switzerland, Turkey, the UK, and Vietnam saw expansion as well. As expected, the Eurozone and Japan had downturns.

Unlike in the US, global manufacturing new orders “contracted for the sixth successive month in November, although the rate of decline was only slight and the joint-slowest during that period. This reflected ongoing weakness in many domestic markets and a further reduction in international trade flows,” according to the JP Morgan report.

Whenever I read these reports, I always feel the industry is bumping around in the middle between near-disaster and elated-growth. But, I'm curious. What do you make of November's mixed bag of numbers? What international PMI numbers do you look at more closely or plan against? How much do these PMIs impact your day-to-day decision-making or affect your near-term spending?

2 comments on “Manufacturing Turbulence… Now What?

  1. SP
    December 5, 2012

    I think overall PMI number do make manufacturing organization to become nervous or happy but at the end every individual organization have their list of targets well defined. They know where the business revenue is coming from. Manufacturing tends to have turbulence everywhere but if you keep your costs low and your quality up, you pertain to be up and running all the time.

  2. Jennifer Baljko
    December 7, 2012

    SP – Agree that most manufacturers aim to keep costs down and quality up, but what I wonder is how they use or intrepret micro or macro economic data to make near-term manufacturing decisions. It's something people talk about, but never really talk about.

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