The Institute for Supply Management (ISM) is a ISM is a not-for-profit trade association that serves professionals and organizations with an interest in supply management. It was founded in 1915 and has produced its PMI or Purchasing Managers Index since 1948. The index is one of the first measures of monthly economic activity released and is based on a survey of purchasing managers in the manufacturing sector gathering data on production level, new orders from customers, speed of supplier deliveries, inventories and employment level. The base value for the index is 50.0 so a figure higher than that suggests a general improvement in the manufacturing sector, while a figure below 50.0 suggests decline. A PMI consistently falling below about 45 suggests that the economy is in outright recession.
The PMI for March was 51.3 suggesting that there was slight – though not robust – growth in the American manufacturing sector in March. This was down from 54.2 in February and was the 4th consecutive month of growth. According to the ISM, the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, while the Employment Index registered 54.2, and the Prices Index was 54.5, reflecting significantly less pricing growth than in February. Of the 18 manufacturing industries surveyed, 14 are reporting growth in March, while three reported contraction.
The PMI has been generally above 50 reflecting growth in the manufacturing sector since late 2009; however, the overall level of the index has been steadily falling since the beginning of 2011. This suggests that the economic recovery, at least as far as manufacturing is concerned, has been weakening. As such, the ISM has been tracking overall economic growth fairly well. The deep recession of 2008 and 2009 has simply not been followed by any substantial economic recovery, even after 4 years of expansionary government policies.
We continue to believe that overall market forces point to continued economic growth; however, this is being hampered by a general lack of confidence in future business conditions by the entrepreneurial classes. It may even be likely that the overall growth in government imposed restrictions on business, on movement and on economic activity since 2001 has created an environment that hampers substantial new investment and economic growth. In a Keynesian sense, the economy’s potential growth rate may have been substantially reduced (or from a more market based economic perspective, market entry costs have increased, precluding productive investment).
From the perspective of an individual company or industry there seems to be little reason to believe that the US economy will advance out of neutral quickly and the recent statistics may actually suggest that the economy may have passed the peak of the current growth cycle.