Covid Economics: 3 Ways OEMs Can Reduce Margin Erosion
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After setting several high marks for the year to date in June, the domestic manufacturing industry adjusted its growth pace in July. A leading national manufacturing index, the Institute for Supply Management’s PMI, declined slightly from June to 52.7 percent. “The PMI was down 0.8 [percentage points] but still growing for the 31st consecutive month,” said Bradley J. Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. Anything over 50 indicates growth; anything under 50 indicates contraction.
The PMI’s supporting indexes were a mixed bag for the month: new orders increased by 0.5 percent to 56.5 percent; and production increased to 56 percent, 2 percentage points above the June reading of 54 percent. Employment, inventories and prices were all down from the prior month. “New orders hit a new high for the year, and that is supported by 10 out of the 18 industries we follow reporting growth [in new orders],” said Holcomb. "Of those, three are among our top industries.”
Inventories at manufacturer sites – which declined by 3.5 percent from June to 49.5 percent -- dropped below 50. This isn’t necessarily a negative. “If you look at production,” said Holcomb, “you’ll see it is going gangbusters and that’s always relative to labor, meaning manufacturers are using their available assets. They covered a lot more backlog [than prior months] and that will chew up inventory.”
Although the computer and electronic products manufacturing sector reported that “July was really slow, slower than the previous month,” it is “optimistic for the remainder of the year.” The strength of the U.S. dollar continues to impact exports across all industries, however. “There are new concerns about China which reported a lower manufacturing index,” said Holcomb. “There’s also concern over Greece, so it is not surprising exports have slowed down.”
Oil prices continue to dog the petroleum and coal products sector: while some manufacturers are benefiting from low oil prices—the ISM’s prices index declined by 5.5 percent to 44.0—refineries and oil producers are saying that projects in North America are not economically viable. “The oil and gas jobs outlook is in retrenchment, one participant said. “Petrochemical (refining and chemical manufacturing) is positive from a margin perspective, but focus is steady on safe cost containment.”
Of the 18 manufacturing industries tracked by the ISM, 11 are reporting growth in July in the following order: textile mills; paper products; apparel, leather and allied products; printing and related support activities; furniture and related products; fabricated metal products; nonmetallic mineral products; electrical equipment, appliances and components; food, beverage and tobacco products; transportation equipment; and miscellaneous manufacturing. The five industries reporting contraction in July are: wood products; primary metals; plastics and rubber products; chemical products; and machinery.
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