While the economy shows signs of improvement, the manufacturing sector continues to contract, according to the August 2008 manufacturing Report on Business released by the Institute for Supply Management (ISM) yesterday.

The Purchasing Managers Index (PMI) average for the last 12 months is 49.6 percent, with a high of 50.7 percent in January and a low of 48.3 in February. A PMI higher than 41.1 percent, over a period of time, generally indicates expansion for the overall economy.

The PMI for August dropped by 0.1 percent to 49.9 percent from the 50.0 percent registered in July. A reading above 50 percent generally signals expansion and below 50 indicates the sector is contracting.

"This continues the 2008 trend toward negligible growth or contraction each month, but ultimately results in very little overall change in the sector," says Norbert J. Ore, C.P.M., chair of the ISM Manufacturing Business Survey Committee.

Change, for better or worse, has been slow in coming for manufacturers as they continue their balancing act between costs and profits.

Prices, though having dropped significantly, are still having a notable impact on manufacturers. The ISM Prices Index registered 77 percent in August, indicating that manufacturers are paying higher prices on average when compared to July. Commodities that have gone up in price include aluminum, polyethylene, polypropylene, plastics and petrochemicals.

Fuel oil, natural gas, soybean oil, copper and corn have come down in price. Diesel fuel prices continue to yo-yo.

Sixty percent of respondents reported paying higher prices, 6 percent said they paid lower prices and 34 percent reported that prices remained the same from the previous month.

Though high costs have been bleeding manufacturers' bottom lines, increases in new orders (domestic and abroad) have been able to suture the wound somewhat. New orders overall registered at 48.3 percent, a 3.3 percent increase from July.

The increase in new export orders, which went up 3 percentage points to 57 percent from 54 percent in July, has helped manufacturers weather the slump in domestic spending. "Export orders picked up additional momentum, and that is important to manufacturers as domestic demand remains soft for most industries," Ore says.

This is the 69th consecutive month of growth in the new export orders index.

The boost in export orders that has so far helped keep manufacturers afloat is mainly due to the weakened dollar. This increase in trade may wane, however, as the economies in Europe and Asia show signs of shrinkage, Bloomberg News reports.

But it hasn't diminished yet, as "the impact from global weakening so far on U.S. manufacturers remains modest,'' Aaron Smith, an economist at Moody's Economy.com, said in an interview with Bloomberg Television.

The dollar has been gaining ground in recent weeks with the euro falling to a low of $1.44 on Tuesday and the sterling trading at $1.7669, BBC News reports.

Analysts attribute the strengthening dollar to a more positive U.S. economic outlook in comparison to economic forecasts for the U.K. and other European economies, BBC adds.

Despite a potential slowdown in exports, manufacturers see the drop in commodity prices such as oil and the positive turn for the dollar as positives.

A respondent from the fabricated metal products industry commented in the ISM survey that "the lower oil prices and stronger dollar are good news," while another from the electrical equipment sector added that "business is picking up and continues to improve for projects to be constructed in the third and fourth quarters of 2008."

The manufacturing sector has seen growth in some areas, not in others and contraction overall, but just barely, and manufacturing seems to be holding up quite nicely, Ore says.

Resources

August 2008 Manufacturing ISM Report On Business
Institute for Supply Management, Sept. 2, 2008

Orders for Durable Goods in U.S. Unexpectedly Gain (Update 2)
by Timothy R. Homan
Bloomberg News, Aug. 27, 2008

Pound Dips Further Against Dollar
BBC News, Sept. 3, 2008