US manufacturing output holding its own – but how important is it?

ism-purchasing-manager-indexThe US is one of the most important drivers of the world economy and its global supply chains, therefore as we’ve reached the midway point for the year 2015 it seems like a good opportunity to take a quick glimpse to see where US manufacturing currently is, and where it may be headed for the rest of the year.

The US economy as a whole is still in the throes of a rather slow recovery from the recent recession which in itself started here in the US with sub-prime mortgage fiasco. Although US manufacturing has been the strong point of this is somewhat slow recovery, it has unfortunately fallen off slightly over the past year and in particular during the first six months of 2015.

The US Purchasing Managers Index

An important measure of US production activity is the US Purchasing Managers Index (PMI) which is published by the Institute for Supply Management. As most supply chain professionals are probably aware a score of over 50 in the index shows that production activity is increasing. Conversely a score below 50 indicates that it is diminishing.

Having now taken the month of June into account, the United States has recorded an expansion in production/manufacturing over the past consecutive 30 months; an achievement which is indeed noteworthy and that has helped to fuel activity in global supply chains across the world.

However, although the indicators for the first six months of this year are still above 50 there is something of a slowing down. When measured against the activity over the same period last year, manufacturing is down between 3% and 5%. What this means is that although manufacturing is still increasing, it is doing so at a slower rate; something which may well be reflected in many global supply chains.

Figures from the US Federal Reserve

Another indicator as to what is going on with US manufacturing, and how it may affect activity in global supply chains is the US Federal Reserve, with particular regard to manufacturing output. The thing we’d be to point out however, is that we are interested in manufacturing output itself, rather than complete industrial output. This latter category includes output from various utilities and mining facilities as well as manufacturing output. We concentrate on manufacturing output alone because it is less volatile than when the other categories are included, as they include the variances in things like electricity usage during hot and cold spells.

Highs and lows

When looked at over the same period of time, the data from the US Federal reserve is if anything slightly worse than the scores from the PMI. Since the last peak in manufacturing in the year 2007, the US Federal Reserve index dropped dramatically in June 2009 following the advent of the recession. The index (which is based on a score of 100) fell to 80, which is one of the lowest score was recorded. It also coincided with a large drop in activity in global supply chains which of course would have been expected.

Since the low of 2009 it took another six years to return to the 2007 production figures, with the index ultimately topping out at 101.7 in July 2014.

Good news for world economy and global supply chains

In terms of good news for the world economy and global supply chains, so far this year the Federal Reserve index has stayed above the 100 benchmark. However, it too has remained low, fluctuating between 101.3 and 101.9. In June 2014 the figure was 101.7 which indicate that the index 1.7% higher than it was in 2007.

How the various manufacturing sectors perform

The overall index figures are of course averaged out across all of the various manufacturing sectors. When the individual sectors are examined it becomes apparent that some sectors are doing remarkably well; some are holding their own, and some are underperforming.

For example, semiconductors and equipment recorded a score index of 307.8 – a score indicating that it was 207.8, above the figure recorded in June 2007. Heavy Duty Truck manufacturing, Railroad Rolling Stock manufacturing and manufacturing in Computers and Electronics, were all in a healthy situation recording figures of between 155.3 and 177.2.

At the other end of the scale the sectors with the poorest index ratings were Hardware with 67.6; Textiles with 62.5, and Apparel and Leather Products with only 61.

The short-term prognosis is good

As an indicator of what could be happening in the rest of the world economy and in global supply chains as a whole, the state of US manufacturing is of some concern, but as long as the index remains above 100 the indication is that economic activity in general is in a reasonable state of health. However, it will only take an event such as the Saudi Arabians abandoning the current OPEC policy, to metaphorically throw the cat back amongst the pigeons.

How influential do you believe the US manufacturing sector to be in terms of driving world economy and fuelling global supply chains? What are the key elements to think need to be taken into consideration and reporting on regularly?

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