U.S. Manufacturing Continues Turnaround

The Institute for Supply Management (formerly the National Association of Purchasing Managers) released its much-watched index of U.S. manufacturing activity for May 2004, showing manufacturing activity continued strong despite economists' predictions it would fall in the face of pressure on the dollar and surging oil prices. Equally important, ISM's hiring index showed manufacturing employment finally began to catch up with the economic rebound; in fact, May recorded the highest index of manufacturing employment since 1973. The manufacturing activity index in May hit 62.8, up from April's 62.4, marking a full 12-month cycle of continuous increases. The ISM said May's PMI of 62.8 translates to approximately 7.3% annual growth for the U.S. GDP's manufacturing component. An index holding over 50 indicates a general expansion, while under 50 indicates a general contraction. Within the index, some manufacturers will be performing better than others; the ISM does not always break that out in a way specifically meaningful for bearing manufacturers. Key in the ISM report is May's rate of manufacturing employment growth, indexed at 61.9, up from 57.8 in April and now at its highest point since April 1973. The ISM Employment Index has now grown for 7 consecutive months, following 37 months of contraction. The ISM report said, "Comments from respondents indicate demand is strong in most industries, but they also express major concerns about rising materials prices and the cost of energy in particular. A number of respondents mention adding permanent jobs, as well as adding temporary and seasonal workers. While there a re mentions of allocation, extended lead times and low inventories, it appears that members are able to work through these issues at this time." Manufacturers showed confidence, not only by investing in new hires, but also by replenishing inventory closer to sell-down rates; even though overall inventory levels continued to fall, it is doing so very slowly. The ISM's inventory index rose to 49.3 in May, from 44.8 in April. U.S. Department of Commerce reports, lagging by a month, backed the ISM's April results. The DOC said factory orders in April dipped 1.7% from March, but that March factory orders had been up more than 5% from February. Inventories also increased, by 0.4%, giving an April inventory:ship ratio of 1.24, up from 1.22 in March. Meanwhile, the Reuters Eurozone PMI Report of Manufacturing and Services also came in above expectations. At 54.9 in May, it was improved from April's 54.0 and at its highest level in over three years. However, the Eurozone improvement was tempered by apparent weakness in that the growth was fueled by higher exports rather than internal demand, and by the finding that employment did not keep pace, clocking in at only 48.7, up from 48.6 in April. European Central Bank President Jean-Claude Trichet said, "The economic recovery has strengthened over recent months. We have also witnessed stronger inflationary pressures over the short term. Nevertheless, we are still of the view that the medium-term outlook remains in line with price stability." At its meeting, the ECB decided to hold interest rates, marking a full year with its refinancing rate at 2.0%. The UK's Chartered Institute of Purchasing and Supply's purchasing managers' index of manufacturing activity reached 55.6 in May, up from 55.2 in April. Last week, the Confederation of British Industry released survey results indicating manufacturing orders at their highest levels since 1998. Contradicting and confounding those survey results, however, were official government reports indicating U.K. factory output declined in February and again in March. Most manufacturing analysts around the world remain positive about the near future, despite recent rapid increases in energy costs. Looking ahead, About Mr. Ore was upbeat, saying, "It appears that second-quarter growth will be very solid, and the momentum should carry over into the second half of the year. 2004 is shaping up as one of the better years for manufacturing. Many respondents indicate that order backlogs are growing for the first time in several years."