By Hayley Null, manufacturing industry marketing lead at NetSuite
⏰ 5-minute read
- Two major manufacturing reports came out last week, delivering an ambivalent forecast for the industry in 2019.
- Overall, most areas of the manufacturing sector are showing growth, but at a slower rate than in the recent past.
- Grow Wire spoke with a manufacturing company whose current business reflects the reports’ findings.
Last week was eventful for the manufacturing industry--two major monthly reports came out, both ambivalent on the state of the manufacturing industry going into 2019.
The Markit Purchasing Managers’ Index (PMI) is a report based on monthly surveys of senior purchasing executives at over 400 manufacturing companies. It serves as health gauge for the manufacturing sector. The ISM Manufacturing Index, meanwhile, is a report based on surveys of purchasing and supply management executives at more than 300 manufacturing firms. It monitors employment, inventories, production, new orders and supplier deliveries in the sector.
Both indexes report lower manufacturing growth on multiple fronts over the past month, with some manufacturers suggesting economic trouble and some remaining cautiously optimistic. Grow Wire spoke with a manufacturing company whose current state of affairs echos the reports’ findings.
Takeaways from the Markit PMI
The data from the Markit Index illustrates a solid improvement in the health of the manufacturing industry, though it’s slower than in the recent past.
The PMI fell from 55.3 points in November to 53.8 points in December, a 15-month low for the index. This downward decline is seen in a couple of key categories: The industry saw the weakest improvement in operating conditions since September 2018. New order growth eased to a 15-month low. Business confidence among manufacturers is at its lowest since October 2016.
There are industry concerns around a slower demand growth from customers and the durability of new business growth.
The rate of job creation softened to an 18-month low due to problems with employee retention and finding suitable staff.
Manufacturers have rising concerns over the impact of tariffs--just over two-thirds of manufacturers are reporting higher costs, and in turn prices, due to tariffs.
Intermediate goods manufacturers (those who supply inputs to other manufacturers) report the weakest rise in new orders in over two years.
The PMI suggests slowed growth in many areas, but not all its findings follow that pattern. Some areas are changing quickly in a way that looks to benefit manufacturers:
Inflationary pressures eased at the end of 2018, dipping to an 11-month low.
New export business grew at an accelerated pace in December.
New orders from abroad increased for the fifth successive month (and at the fastest rate since January 2018). However, a weaker overall rise in new orders led to a decrease in business confidence among manufacturing companies in December.
Consumer goods manufacturers see increased demand.
Investment goods (i.e. plant and machinery) manufacturers saw stable growth.
Although ending the year with a softer overall expansion, the final quarterly average of 2018 was strong and quicker than that seen in 2017.
Overall, the level of optimism for the manufacturing industry is solid, but it’s well below the long-term industry average.
"Manufacturers reported a weakened pace of expansion at the end of 2018 and grew less upbeat about prospects for 2019,” said Chris Williamson, chief business economist at IHS Markit. “Optimism about the outlook slumped to its gloomiest for over two years. The month rounds off a fourth quarter in which manufacturing production is indicated to have risen at only a modest annualised rate of about 1%.... Companies have become increasingly cautious about spending amid rising uncertainty about the outlook.”
Takeaways from the ISM Manufacturing Index
The ISM manufacturing index is also on the overall decline.
The index fell 5.2 points from 59.3 in November to 54.1 in December, its lowest level since November 2016. The 5.2-point drop month-over-month has been surpassed just twice this century: in October 2008 and following Sept. 11, 2001. As recently as August, the ISM index was at a 14-year high.
You’ll notice that each of the report’s indexes shown below are above 50 points, which means those areas--and the manufacturing industry as a whole--are expanding. However, they're expanding at a much slower rate than in the past.
“The plunge in the ISM manufacturing index adds to the unease about the prospects for the global economy and will reinforce financial market gloom,” James Knightley, chief international economist at ING, said in a press release.
These statistics make December the 116th consecutive month of expansion for the overall economy and the 28th straight month of growth in the manufacturing sector.
Data show that “the manufacturing community continues to expand, but at much lower levels and at a sharp decline from November," said Timothy Fiore, chair of the Institute for Supply Chain Management.
All five main components of the ISM index (employment, inventory, production, new orders, supplier deliveries) declined from November to December, maintaining expansion but at a lower rate than prior periods. Demand softened, with new orders having the sharpest decline in almost five years, and backlog of orders declined to a level of zero-expansion. Consumption-- including production and employment-- continued to increase, but at lower rates than previous months. Inputs -- supplier deliveries, inventory and inputs -- softened as well. Exports continued to grow, but at a slower pace.
How do these industry predictions match up with the reality that manufacturers are facing?
Let’s look at a real-world example.
Depatie Fluid Power Company specializes in the sales, assembly and distribution of fluid power and automation components including valves, cylinders, fluid connectors, hoses and seals. Depatie also recently acquired a company that is strictly in the business of manufacturing hydraulic power units. ISM reported that machinery manufacturers were one of the top-growing manufacturing sectors in December. And for the most part, this industrial supply company is seeing results in line with what the indexes reported.
Demand for existing Depatie products has reduced or leveled off as supplier backlog and lead times have been mitigated and capital expense projects begin to soften, said Ryan Thomas, Depatie’s general manager.
“Our retail stores, usually our first business segment to feel a change in economic cycle, saw a 5 percent accumulative reduction in Q4 across all locations,” he told Grow Wire.
Michigan-based Depatie Fluid Power Company sells fluid power and automation components in its online shop.
Although demand is weakening, Depatie sees a few key areas for expansion in 2019. There is strong growth potential for new product R&D as customers focus on development of future revenue streams and need to augment their engineering capacity due to a shortage of engineers.
“We currently have five new programs scheduled for production launch in 2019 and a robust pipeline of potential projects depending on timing and capacity,” said Thomas.
And that’s not all he’s optimistic about.
“We believe positive growth potential also exists with customers searching for supply alternatives to increase capacity, reduce lead times and mitigate impacts of the tariffs,” he said. Depatie will meet this need “by leveraging our investment in business systems, like our e-commerce platform, to connect with the next generation of buyer for our standard product offering.”
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