Manufacturing PMI reports show historic rebound in June

PMI data from Institute for Supply Management (ISM) and IHS Markit shows that manufacturing had a historic rebound in June. Demand, production, and employment all grew as supply chains started hitting their stride. But economists warn manufacturers to exercise caution with COVID-19 cases still rising. Getty Images

Manufacturing has received a serious confidence boost. After two straight months of historically low industry Purchasing Managers’ Index (PMI) readings, June’s index showed record-breaking bounce-back numbers from two key manufacturing supply chain and economic indicators.The most recent reports from the Institute for Supply Management (ISM) and IHS Markit show that manufacturers responded quite well to the reopening of many industry sectors last month.

ISM’s PMI shot up 9.5% from May to 52.6%. Any PMI reading more than 50% indicates expansion in the industry. That increase is not only a significant marker that manufacturing has expanded for the first time since February, it’s also the biggest month-over-month PMI increase since 1980.

The June Manufacturing ISM Report On Business set other records, too, adding more optimism to the industry.

“As I was putting together the analysis and trying to write my notes in the report, it sounded awfully familiar to April in terms of setting records not seen in modern times,” ISM Manufacturing Business Survey Committee Chair Timothy Fiore said during an appearance on Manufacturing Talk Radio.

Except, unlike April’s report, which showed historic declines in several subindices, June provided the exact opposite in four notable month-over-month categories. The New Orders Index increased 24.6% to 56.4%, growth not seen since 1948, when ISM started tracking quantitative data.

“That is the best news in the entire report because it shows a willingness on the part of businesses to start diving in and rebuilding inventories,” Keith Prather, economist and managing director at Armada Corporate Intelligence, said. “It also typically leads to business activity over the next 6-8 weeks as manufacturers work to fulfill those orders.”

The Production Index jumped 24.1% to 57.3%, the largest increase since 1952. The Employment Index went up 10% to 42.1%, the biggest bump since 1961, but still off the 46.4% average it was between November 2019 and February 2020. The Supplier Deliveries Index decreased 11.1% to 56.9%, an adjustment not seen since 1979.

“I feel really good about this,” Fiore added. “I felt that coming into this, 52%-plus would be a really good performance, so I’m not surprised. May’s report didn’t fully reflect a full month of reopening. Well, now we have that. We also have the big question if we can sustain this going from Phase 1 to Phase 4. The good thing that happened here is that international trade is coming back to some extent.”

The Export Orders Index registered at 47.6% in June, an increase of 8.1% from May. And that’s despite China’s somewhat disappointing 50.9% manufacturing PMI for June.

“That’s very weak for China,” said Fiore. “That’s like the third month of less than 51%. That number at this point should be in the high end of the 50s. They need to expand at a much higher rate than we do.”

Also regaining momentum are domestic and global supply chains. While still in contraction territory at 56.9%, the Supplier Deliveries Index has significantly softened since April’s 76% reading. A reading below 50% indicates faster deliveries, while a reading above 50% indicates slower deliveries.

“We've synchronized the supply community with the factories’ production to some extent,” Fiore said. “At 56.9%, that’s appropriate tension. I’d like it to be closer to 54%, but 57% isn’t far off.”

The supply chain synchronization has also been felt among metal fabricators and producers.

“Thankfully, we are in quite a few industries, so impact wasn't as harsh on us and more stable,” said the anonymous ISM panelist from the fabricated metal products sector. “During the last two weeks, our bookings have grown, and supply seems to be more readily available.”

The representative from the primary metals sector added, “We are seeing an increase in orders as the economy starts to get rolling again. Slow and steady, sales are increasing. So far, so good.”

Improvement in the supply chains is supported by the fact there’s now better price parity. The Prices Index has also increased to 51.3, up 10.5% from May. “This means we have price parity between buyer and seller,” Fiore said.

Markit’s PMI also showed a huge boost in June. At 49.8%, it was a Markit-record 10-point increase. Like with ISM, the report also showed improving demand, output, and employment in U.S. manufacturing.

“The record rise in the New Orders Index, coupled with low inventory holdings, bodes well for a further improvement in production momentum in July,” Chris Williamson, Markit chief business economist, said in the report. “A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive.”

A Stark Reminder

But that revival hinges on manufacturing’s ability to keep factories open and continue production as COVID-19 cases have surged in recent weeks. With the U.S. nearing 3.1 million reported cases, some health experts are calling for numerous states to restore mandatory shutdowns. On Thursday, July 9, alone, Alabama, Iowa, Missouri, Montana, and Wisconsin each set single-day records for new infection cases.

“While the PMI currently points to a strong V-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again,” Williamson said.Even with the unpredictable nature of the virus infection rate, Fiore doesn’t think states will go back to the level of shutdowns like we saw in late March and all of April.

"One week the rate goes up and the next week it seems to be dropping off,” he said. “I don't think it's a counting issue. I think we've learned how to manage our really vulnerable population. But the cases are going to continue to grow. I think anybody who's vulnerable to having a bad outcome has to protect themselves because I don't think the country and society can afford an entire economic shutdown again.”

It’s a stark reminder that we are indeed still in the midst of a coronavirus crisis. These optimistic manufacturing demand and production numbers only look tremendous because they are being compared to the awful data from the previous few months. And industry economists are more than aware that June’s data, while certainly promising, do come with a misleading message.

“Comments from survey respondents generally sound optimistic because there is new activity, and it is exciting,” said Prather. “But they warn that we are due for a swoon of sorts in the next two to three months as this ‘reopening’ surge yields to what is really some underlying global weakness in activity. Compared to last month, it looks wonderful. Compared to economic activity from a year ago, we are still in crisis.”