Manufacturing Ready to Roll

Joan Gunin, Don Hogsett, July 9, 2007

The nation's manufacturing sector rebounded strongly during the second quarter of the year and gained strength for a fifth straight month in June, getting a big boost from an unusually strong gain in production, the nation's purchasing managers reported.

The widely watched gauge of smokestack America compiled by the Institute for Supply Management (ISM) rose by 1.0 percentage point to a reading of 56.0%, building on gains during April and May. "Following a weak first quarter, the manufacturing sector rebounded in a strong fashion during the second quarter," said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee.

In June, manufacturing expanded at its fastest pace since April 2006 when the purchasing managers' index registered 56.9. Moreover, "This performance appears sustainable in the third quarter due to the current strength in new orders and production," which rose 0.7 and 4.6 percentage points respectively, said Ore.

All that is good news for the overall economy, said the ISM, noting that a Purchasing Managers' Index (PMI) of 41.9%, over a period of time, generally indicates an expansion of the overall economy.

"Therefore, the PMI indicates that both the overall economy and the manufacturing sector are growing. The past relationship between the PMI and the overall economy indicates that the PMI average for January through June, 53.0%, corresponds to a 3.4% increase in real Gross Domestic Product (GDP) annually. In addition, if the PMI for June, 56.0%, is annualized, it corresponds to a 4.4% increase in real GDP annually."

Driving growth in the sector, in addition to production and new orders, was a 1.0 percentage-point growth in order backlogs. In more good news, the index measuring the price manufacturers pay for raw materials, while still high, grew at a slower pace, with a reading of 68.0, down from 71.0 in May.

Further, customers' inventories contracted to a reading of 47.0 from 48.0 in May, suggesting they may have to restock their shelves soon, fueling further growth in manufacturing.

Manufacturing benchmarks
Month-over-month percentage point change

Source: Institute for Supply Management
Purchasing Managers' Index 1.0
New Orders 0.7
Production 4.6
Employment -0.8
Inventories -0.8
Customers' Inventories -1.0
Prices Manufacturers Pay -3.0
Order Backlogs 1.0
Export Orders -3.0
Imports -3.0

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