Manufacturing Indices Looking Up

Don Hogsett, March 20, 2006

The manufacturing sector, a key driver of the U.S. economy, picked up steam during February. This reversed a three-month slump, reported the nation's purchasing managers in a monthly update on the state of smokestack America.

The Purchasing Managers' Index perked up by 1.9 percentage points to a level of 56.7%, canceling out a dip of 0.8 percentage points the month before, and rose for the first time since October 2005. With the February rebound, the index is now hovering modestly above its 12-month average of 55.4%.

A reading greater than 50.0% indicates growth in the sector, while anything beneath points to a contraction. Driving the monthly gain were increases in new orders, production, employment and order backlogs.

The prices that manufacturers pay for raw materials and supplies continued to grow during the month, if at a somewhat more subdued pace, and are still high enough that price inflation remains a major concern among manufacturers. The prices index declined by 2.5 percentage points, to a level of 62.5%, and is now substantially beneath a recent high of 74.0% recorded in November 2005.

The Institute for Supply Management, which compiles the monthly index, said the most recent reading “indicates that both the overall economy and the manufacturing sector are growing.” The ISM said, “The past relationship between the Purchasing Managers' Index and the overall economy indicates that the average PMI for January and February, 55.8%, corresponds to a 4.7% increase in real gross domestic product (GDP).” Moreover, the group said, “If the PMI for February, 56.7%, is annualized, it corresponds to a 5.1% increase in real GDP annually.”

Manufacturing benchmarks Month-over-month percentage point change

Source: Institute for Supply Management
Purchasing Managers' Index +1.9
New Orders +3.9
Production +0.8
Employment +3.7
Inventories +3.1
Customers' Inventories +2.5
Prices Manufacturers Pay -2.5
Order Backlogs +1.0
Export Orders -1.5
Imports +0.5

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