Manufacturing Jumps In June - July 1, 2011
The nation's manufacturing pace unexpectedly quickened in June, with the index of manufacturing activity climbing to a moderately expansionary level of 55.3 in the latest month. That compares with May's survey result of 53.5 and expectations for a still-slower expansionary pace of 51.8 in June.
Note that the survey, which is issued by the Institute for Supply Management, a Tempe, Arizona-based trade group, suggests that the manufacturing sector is gaining traction when readings surpass 50.0. A reading that is below that line indicates that this key industrial sector is contracting. A survey result of less than 42.0 is consistent with recessionary conditions.
It should be noted that the June result was the 23rd month in a row in which manufacturing had shown an overall increase. This result was largely consistent with readings on aggregate economic growth, which has now shown improvement for 25 months in succession.
Breaking the survey result down by components, we see that new orders improved slightly last month rising from 51.0 to 51.6. Moreover, gains also accelerated for production, 54.5 versus the prior month's 54.0; for employment, 59.9 versus 58.2; and for supplier deliveries 56.3 versus 55.7. Meanwhile, prices rose less quickly last month coming in at 68.0 versus May's 76.5. The only declining sector were backlogs, which eased to 49.0 from 50.5 in May. All in all, it was an encouraging report, and suggests that the economy's hoped-for second-half comeback may well be on schedule.
Meanwhile, respondents are saying that they are still seeing inflation on the horizon, but at a reduced rate from earlier in the year. Our sense is that the recent retreat in oil prices may have a lot to do with this less-onerous pricing situation. Also, we are hearing that business, although up and down, is still better than at comparable points a year ago. We are also hearing that the supply shortages emanating out of Japan following that nation's tragic earthquake and tsunami in March are still with us. However, others note that in spite of such shortages, sales are still stronger than expected across both retail and industrial lines. Finally, some have indicated that consumers are still being cautious in their ordering and spending plans and actions.
Taken as a whole, this report was refreshing and should be well received by economic watchers and pundits alike. It suggests that if the trend persists, the nation's gross domestic product, which may have inched ahead by just 2%, or so, in the just-ended quarter, could well expand by 3%, or even better, over the final six months of this year. If that is the case, the stubbornly high unemployment rate, which is still at 9.1%, could start to finally come down.
At the time of this article's writing, the authors did not have positions in any of the companies mentioned.