Behind the Numbers in ISM’s Q4 Report on Business

On January 5, the Institute for Supply Management (ISM) released its latest Report on Business, a monthly publication that examines industry trends and statistics within the manufacturing sector. The composite Purchasing Managers Index (PMI), referenced below, is compiled and used by the ISM to analyze the state of the economy and predict future growth or contraction based on five categories: New Orders, Production, Employment, Supplier Deliveries and Inventories. A PMI over 50% indicates that the manufacturing environment is expanding.

Here’s a rundown of the PMI for each month in 2020:

Month

PMI

Month

PMI

January

50.9%

July

54.2%

February

50.1%

August

56.0%

March

49.1%

September

55.4%

April

41.5%

October

59.3%

May

43.1%

November

57.5%

June

52.6%

December

60.7%

Average for 12 months – 52.5%

High – 60.7%

Low – 41.5%

Keeping up with the overall economy, manufacturing expanded over the past eight months, closing out the year with a PMI higher than any clocked in 2019. Panelists expressed optimism entering 2021, offering three positive comments to every one negative comment in their responses. Sixteen of the 18 manufacturing industries tracked recorded growth in December 2020, with only Printing & Related Support Activities and Nonmetallic Mineral Products reporting overall contraction.

Prices (77.6% in December) reached its highest reading since mid-2018, with steel, copper, aluminum and lumber continuing to experience increases. Aluminum gained 11% from the beginning of 2020 and 36% from April 2020, while the price of lumber opened 2020 at $404.51 per 1,000 board feet, peaked in September at $909.77 and closed the year at $881.70.

Demand, which is comprised of New Orders, Customer Inventories and Backlog of Orders, continued to grow. Expansion in New Orders (67.9% in December) was supported by New Export Orders (57.5% in December). The panelist representing Computer and Electronic Products noted strong business growth in China. Backlog of Orders (59.1% in December), meanwhile, reached its highest reading since 2018, and what may show even more promise for continued orders are very low levels of Customer Inventories (37.6% in December).

Expansion continued for consumption, which is comprised of Production and Employment. Production (64.8% in December) clocked in at its highest reading since January 2011 when it reached 65.3%. Only two of 13 industries tracked experienced a contraction in production, Nonmetallic Mineral Products and Miscellaneous Manufacturing. In November, Employment dropped back into contraction territory (48.4%), but has since rebounded, clocking in at 51.5% in December. A panelist noted that the November contraction was due primarily to challenges in attracting and retaining direct labor.

Although there has been some recovery since the initial COVID-19 outbreak in the U.S., panelists note that industry growth has been limited by the effects of the pandemic, with companies facing ongoing personnel challenges as they continue to try to hire new employees and integrate returning ones.

Worthy of note is the median age for employees in the manufacturing sector, which stands at 44.1 years. The CDC warns that risk of hospitalization and death is significantly higher for older adults than in individuals age 18-29. Plus, some individuals in this age range may be taking care of elderly parents, which may result in concerns of being physically able to return to work. Additionally, facilities have been forced to shut down for frequent cleaning to comply with CDC recommendations, disruptions that result in slowdowns in production and inefficiencies. These challenges won’t in and of themselves bring an end to growth, but will continue to delay manufacturing from reaching its full potential.

For further information on the Report on Business, go to https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/december/

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