Business activity in manufacturing grew for the second straight month, says a leading economic indicator. And that indicator is the highest it’s been since the end of 2002. Find out what it means:

The latest Manufacturing Report on Business by the Institute for Supply Management (ISM) is keeping hopes of an economic recovery alive. According to the August report, business activity in manufacturing grew for the second month in a row while the overall economy expanded for the 22nd consecutive month.

The August report follows a month of encouraging numbers. While July marked the first time in five months that the index topped 50%, the report’s manufacturing index in August surged to 54.7%, up 2.9 percentage points from July, reaching its highest level since December of 2002.

Based on a survey of purchasing managers, an index above 50 indicates expansion within the manufacturing sector over the prior month, while a reading below 50 signifies contraction. An index at 50 means that there was an equal balance between manufacturers reporting gains and declines in their business.

Norbert J. Ore, who manages the index for the ISM, says that the manufacturing sector seems likely to maintain its upward movement for the rest of the year. “Though two months of growth do not establish a trend, there is strength in the various segments of this report that we have not seen for some time,” Ore notes. “New Orders and Production have both been above 50% for four consecutive months; the continuation of a second half recovery appears on track.”

While ISM’s August New Orders index—a closely monitored indicator—rose 3 percentage points from July and hit 59.6%, its Production index jumped 8.3 percentage points to 61.6% in August.

“The surge in August Production is very positive for the manufacturing sector. The Production index is the highest that it has been since June 1999, when it also registered 61.6%,” says Ore. Meanwhile, “the New Orders index reflected its highest reading since January 2003. The overall picture is encouraging as many manufacturers traditionally experience an upturn during the last four months of the year,” Ore continues.

The backlog of orders also trended positively in August. However, employment in the manufacturing sector is still shrinking. For the 35th month in a row, the Employment index registered below 50, standing at 45.9% in August, down 0.2 percentage point from July. Since manufacturing employment is regarded as a lagging indicator of both expansion and contraction, it typically doesn’t change until several months of manufacturing growth, economists say.

Comments from purchasing and supply managers differ by industry. Reports from the Food and Primary Metals industries reveal continuing softness, while the Electronic Components & Equipment, Fabricated Metals, and Industrial & Commercial Equipment & Computers industries claim to be rebounding. Manufacturers supplying the construction industry continue to cite increased activity due to the seasonal surge in construction.

Natural gas prices have somewhat stabilized but remain at a rate that worries manufacturers as well as Ore, who also mentions two other important factors impacting the likelihood of economic recovery—the strength of the dollar and the hefty $30 per barrel price of crude oil.

“Natural gas, crude oil and strength of the dollar are probably the three things right now that are most worth watching,” says Ore. “Crude oil has continued to stay up; natural gas prices we saw during August had a small but inconsequential decline.” While the impact of the strengthening dollar on imports will affect the manufacturing sector, Ore is more focused on export volume, which has been very responsive to the movements of the dollar.

To learn how you might respond to this survey and contribute to this monthly report on the state of the manufacturing sector, please visit the ISM Report or contact Kristin Bryson at ISM (kbryson@ism.ws).

Sources: Manufacturing Optimism Swells
Jim Ericson
Line56, Sept. 2, 2003
http://www.line56.com/articles/default.asp?articleid=4952

August Manufacturing ISM Report On Business
Institute for Supply Management
http://www.ism.ws/