Data: Manufacturing Slump Less Than Meets the Eye

Photograph by Natalie Behring/Bloomberg

A worker paints a refrigerated railcar in Portland, Oregon.

The most respected early read on the state of U.S. manufacturing in April came out today and showed factory activity cooled last month. The details of the data suggested the worst may already be over.

The Institute for Supply Management, a Tempe, Arizona-based group of purchasing and procurement managers, said its factory gauge slipped to 50.7 from 51.3 in March. A level of 50 is the dividing line between growth and contraction.

Orders, the most forward-looking component, actually rose, as did production. Order backlogs, which don’t figure into the headline reading, climbed to the second-highest level since early 2011.

The culprits behind the decline in the ISM index were inventories and employment. Less stockpiling combined with rising demand is a powerful mix that will probably generate bigger gains in production down the road.

That prompted economist Millan Mulraine at TD Securities USA Inc. in New York to say: “The bottom in manufacturing-sector activity may have fallen in place in April, with the outlook for the sector beginning to brighten.”

The drop in stockpiling was probably “strategic,” Bradley Holcomb, chairman of the ISM’s factory survey, said  today on a conference call. Declining commodity prices are prompting companies to wait before buying raw materials in hopes of getting them even cheaper, he said.

“Inventories are in a fine position, albeit low, and ready for a build-up,” said Holcomb.

The decline in the ISM’s employment index is more troubling, especially in conjunction with another report today from the Roseland, New Jersey-based ADP Research Institute that showed factories cut 10,000 workers from payrolls last month.

The ISM hiring index came in at the second-lowest level since September 2009, when factories were still trimming staff as the economy was just emerging from the recession.

Even here, though, there may be other issues at work. The data are adjusted for seasonal changes to allow comparisons between months, and there’s the rub.

Jonathan Basile, an economist at Credit Suisse in New York, pointed out that the employment index last month faced the biggest hurdle for any April in the 66-year history of the ISM index — matching that from April 1962.

Because April is typically a strong month for factory hiring, the seasonal-adjustment process projected the employment index would jump 4.5 points. In reality, the unadjusted reading climbed just 0.5 point, which, after taking out the expected gain, left the index down 4 points.

“Despite the downshift in the headline index, we do not see imbalances between supply and demand that would bring the current industrial expansion to a halt,” Basile wrote.





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