Thursday, September 3, 2009
The Institute of Supply Management (ISM) released its monthly Manufacturing Index today, and we saw it turn positive for the first time in thirteen months – since July 2008.
The downturn in manufacturing is giving way to a recovery, supported by slower inventory liquidation, increased vehicle production, easing credit conditions, and increased foreign demand.
From the beginning of the year the pace of decline in manufacturing, and now the increase in the ISM index is a strong indication that the recession is coming to an end, if it hasn’t already.
Motor vehicle production is providing a big boost to manufacturing in the current quarter. Due to the success of the cash for clunkers program, which could boost vehicle sales by 2.8 million at an annual rate in the current quarter, motor vehicle production will remain strong for the next few months as inventories need to be replenished. Of course, any increase is a measurable improvement from the double-digit declines of previous quarters. The increase in vehicle output is working through the entire supply chain, as auto suppliers and fabricated metal manufacturers are benefiting.
The support from autos won’t last, as the cash for clunkers program likely pulled forward a lot of demand. Still, the recovery in manufacturing appears to be spreading to other industries. The details were very positive for future growth. The difference between new orders and inventories—a proxy for future production—widened by 8.7 points to 30.5. The gap is now the widest since the mid-1970s and a strong indication that manufacturing production will remain strong well into the fourth quarter. The details show some tentative signs that manufacturing is improving outside of autos, with thirteen industries—including textiles, paper and apparel—reporting growth in new orders in August.
The details are supportive of future growth, especially the increase in new orders. We expect a swing in inventories to provide a big support to real GDP over the next couple of quarters.