Manufacturing Ends 1H 2015 Better Than it Started

The U.S. manufacturing industry closed the first half of the year in better shape than it started, but it's still facing a few headwinds. After a number of fits and starts over the past few months the Institute for Supply Management’s June PMI—a leading manufacturing business indicator—is hovering around the 53 percent mark and ticked up by 0.7 percentage points from May.

“I think it is a really positive report and things are moving in the right direction,” said Bradley J. Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. Earlier in the year, “we had a bit of a soft start and an even softer plateau, but we’re on our way back up.” Any number above 50 indicates the manufacturing market is growing; any number below 50 signals contraction. June’s level of 53.5 percent is the highest the PMI has reached since January.

More importantly, the June numbers indicate the U.S. manufacturing industry is consistently moving beyond the effects of an unusually harsh winter and a work stoppage at two major U.S. seaports. The most encouraging news out of the June report was an increase in employment. The ISM’s employment index registered 55.5 percent, 3.8 percentage points above the May reading of 51.7 percent. “That’s actually the largest growth in employment since 2009, and it really does stand out and is forward looking. Manufacturers wouldn’t be adding employees unless they were confident a steady stream of new orders was coming in,” Holcomb said.

New orders grew by 0.2 percent from May to reach a reading of 56. “I’m particularly happy with growth in new orders and in employment,” Holcomb added.

The positive news is tempered, however, by a significant drop in manufacturers’ backlog between May and June. Backlog declined by 6.5 percent to 47.0. The drop is steep, said Holcomb, but not yet reason for concern. “It’s good for customers in that manufacturers are filling orders both new and old,” he said. “At the same time, manufacturers want to keep production levels fairly steady. It’s an interesting number, but knowing how things worked with employment and new orders, we’re still pretty confident.”

The strength of the U.S. dollar continues to have a slightly negative impact on imports and exports. Exports declined slightly by 0.5 percent to 49.5 percent in June. “I think the world is still adjusting to the stronger U.S. dollar,” Holcomb said. “We are happy with something that’s just a tick below 50, though.” Imports also declined, by 1.5 percent from May to 53.5. “The dollar is at play here as well,” Holcomb said. Normally manufacturers would buy a lot of materials from abroad; this time they may be holding off purchases or spending their money closer to home.

High-tech has experienced some of the spottiest performance in the first half of the year. Since the U.S. high-tech industry relies heavily on exports, the West Coast port strikes delayed shipments both in and out of the U.S. during the first half of the year. Manufacturing executives cited the slowdown as a negative factor in four out of the past six months. In the June report, executives in the computer and electronics segment said they saw improvement in defense spending. This doesn’t appear to be tied to the government loosening its purse strings or an increase in the defense budget. None of the other industries that sell to the government, Holcomb said, reported a similar trend.

Of the 18 manufacturing industries the ISM tracks, 11 are reporting growth in June in the following order: furniture and related products; wood products; nonmetallic mineral products; miscellaneous manufacturing; food, beverage and tobacco products; electrical equipment, appliances and components; transportation equipment; fabricated metal products; chemical products; paper products; and computer and electronic products. The four industries reporting contraction in June are: petroleum and coal products; primary metals; plastics and rubber products; and machinery.