Producers Battle Cost Creep

Don Hogsett, June 25, 2007

The U.S. manufacturing sector, a key driver of the nation's economy, gained strength for a second straight month during May, driven by robust gains in new orders, production, and exports.

A monthly barometer of smoke-stack America compiled by the nation's purchasing managers ticked up modestly to a reading of 55.0, up from 54.7 the prior month. The May increase followed a far stronger gain of 3.8 points in April, when manufacturing recovered from a drop in March.

Importantly, the widely watched measure of manufacturing activity has remained above the benchmark level of 50 points for a fifth straight month. Any reading above 50.0 points to growth in the manufacturing economy, while anything beneath that level indicates a contraction, noted the Institute for Supply Management, a trade association of the nation's purchasing managers.

"Manufacturing expanded in May as the Purchasing Managers' Index rose to its highest level in the past 12 months," said Norbert Ore, chair of the ISM Manufacturing Business Survey Committee. "Both the New Orders and Production indices indicated growth, continuing a trend that is now in its fourth month."

Sending out a signal that manufacturers are moving the goods, or trying to contain costs by putting a cap on stockpiles, the purchasing managers' Inventories gauge dipped by 0.2 points to a level of 48.0, said Ore, with manufacturers "now in their 10th month of inventory reduction."

A persistent concern is the prices manufacturers pay for the raw materials they use to make the products they sell. The Prices Index slipped by 2.0 points, but still remained high at a reading of 71.0. "A major concern of respondents is the rate of price increases covering a wide variety of commodities," said Ore.

A sampling of manufacturer comments:

  • "Pricing in the chemicals market is now being influenced by crude oil price escalation."

  • "Customers need detailed explanations to justify increases on raw materials."

  • "Slower than expected GDP growth in the first quarter is causing some 'pull back' on sales forecast/estimates through the end of 2007."

  • "Exports remain above plan with a positive outlook for the balance of '07."

  • "Steady, same as last year at this time."

MAY SNAPSHOT
Manufacturing benchmarks
Month-over-month percentage point change

Source: Institute for Supply Management
Purchasing Managers' Index 0.3%
New Orders 1.1
Production 1.0
Employment -1.2
Inventories -0.2
Customers' Inventories 1.0
Prices Manufacturers Pay -2.0
Order Backlogs -2.0
Export Orders 2.0
Imports -0.5


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