S1-E17 Transcript ISM Manufacturing AND Non-Manufacturing Reports


Welcome to Manufacturing Talk Radio the only show that takes a look at the obstacles and opportunities open to small and mid size enterprises to manufacturers here in America, brought to you by All Metal and Forge Group, with your hosts, Tim Grady and Lew Weiss.

Tim: Hey Guys

Welcome everyone to Manufacturing Talk Radio. We are very excited to have what we think is a very exciting show for you today. We have 2 guests on, both of them from the institute of Supply Management and they are going to give us a look at the economy from 2 perspectives: manufacturing and non-manufacturing.

Tim: Lew you have some updates from our last show?

Lew: I do, and good morning or good afternoon, depending on where you are. The last show we had was with Harry Moser, who is the Executive Director of Reshoring Iniative. Harry talked about the emergence of re-shoring, jobs coming back to America. It seems as though that is the new buzz word and there is a lot of business coming back to the United States after American Manufacturing companies find that foreign markets are not necessarily cracked up to be all that they should be in terms of: quality, pricing, deliveries and so on. Harry presented some very interesting points in that interview.

I highly recommend that you listen to that show, it’s archived on MFG Talk Radio.com and the other gentleman that we had was from one of the bigger states of the United States, Ray Bacon Executive Director of the Nevado Manufacturing Association. He gave us some very interesting insights into what happened in Nevada as a result of the great recession where Nevada which was the Number 1 growth State in the US slipped to number 50 or 51. They are now working their way back not particularly strongly. They are now number 37 and he went into a lot of information about what’s happening in Nevada which is not too unlikely from what’s happening through a good part of the south west. So again you may want to go into our archive on MFG Talk Radio and listen to these 2 gentlemen. It was very enlightening and it gives some insights into what may be happening in your particular State. Tim

Tim: Thanks Lew. Let me introduce our 2 guests now. First, you have heard from Mr Brad Holcomb before on our show, who has talked about the Institute of Supply Management Manufacturing Business Survey Committee, the purchasing manager index number that comes each month and he has also shared with us the semi-annual updates. Brad, how are you today?

Brad: I am just terrific, thank you, speaking from Dallas Texas.

Tim: And we also have with us today, as our new special guest here, Mr Tony Nieves. Tony is the Chair of the Institute of Supply Management Non-manufacturing Business Survey Committee. Tony, how are you today?

Tony: Great, thank you, appreciate being on the show.

Tim: We sure appreciate having you. Before we start to get into the 2 reports, since now of us are immune to human and technology (?hoopsies?)4:18 ISM had one yesterday and I would like to give Brad an opportunity to respond to why the report didn’t hit the airways right as they were (?). Brad, go ahead.

Brad: We did experience a system error yesterday. The software incorrectly applied last month’s seasonal factors to this month’s data, resulting in some incorrect headline numbers. The Team is working diligently to identify the root cause and correct the problem and that is underway right now. We were able to compile the updated, corrected high level indexes by mid morning to the Press and that was notably reported for the rest of the day. Also, the final corrected report has just been posted on the ISM website so everyone can appreciate the full new corrected report.

Tim: That’s great. Lew you had a question for Brad on this topic as well, did you not?

Lew: Yes, I actually have quite a few but I’ll take it a little easy on him. Brad, you must have had a wild day yesterday, to say the least.

Brad: It was a busy, active day indeed.

Lew: I am sure. Getting to the report, there are some questions that I’d like some clarity on and unfortunately the listener-ship probably hasn’t had a chance to see the report because it just recently got posted. But there are some interesting things that I’d like to point out. Regarding production and employment, the production numbers went up 5.3% and unemployment went down 1.9%. It seems to be logically not a correct way that the numbers should be going. Can you explain that a little bit?

Brad: Well, there are a number of these indexes which are tied together. Let me try to make some sense of these. Let me start with new orders because new orders really drive this system as a reflection of: the economy, consumer confidence and so on, and moves its way right back to manufacturing in due time. So it went up nearly 2 percentage points, 1.8 is the exact number but let’s say it’s approximately 2% increase to 56.9 which is a solid number for nearly all quarters. Now let me skip down to the backlog of orders. The backlog of orders went down 3%. So production was not only working on the new orders, but they were working off the backlog and if you add the 2% new orders and the 3% backlog we would get 5% which is almost spot on to the production increase of 5.3%.

I’d rather the audience just think about this directionally as opposed to a math computation, which it is not, but my point is that production was high, in order to address new orders as well as working off some of the backlog of orders.

Tim: So it really would not necessarily affect unemployment numbers, because you are working at over 2 sets. You are reducing one and increasing the other so you are kind of stabling the unemployment numbers. Is that the understanding?

Brad: Yes, and there is now an indirect correlation between employment and production if you will. One gets ahead of the other from time to time, you can’t really tie these things together directly on a month to month basis, or a specific month basis. We do not only look at the data points for the month but the trends in each of these, because both are important and the trend for employment is growing for 11th consecutive month. That’s certainly a positive thing to take away.

Lew: It certainly is. Let me talk with Tony for just a minute. Tony, your report as we viewed it, and that’s why we are excited to have you on the show, is not truly something you can separate from manufacturing although you treat them as 2 very separate reports, measuring 2 very separate segments. Can you give us an overview of how the reports are unique and how they interlace?

Tony: Well I think the most important thing is that we are looking at non-manufacturing and it does represent a very large contribution to GDP, over 80%, and there is inter-dependency between the 2 sectors because many of the manufacturing companies are supplier providers to non-manufacturing companies and vice versa. There is this inter-relationship that exists and it could be from the raw materials that are transposed into products that are purchased by non-manufacturing companies or the services and consulting that non-manufacturing company provide to manufacturing companies. That does make for this intertwined dependency, even though we do look at all the indexes and the rates of change independent from one another.

Tim: Ok, great. Now, based on that discussion that Lew was just having with Brad, do you see similar numbers? I know what we’ve been talking about on MFG Talk Radio is the manufacturing report on business and I think non-manufacturing has some importance here too. Do you see those same kinds of interactions in your report?

Tony: yes, we do and one of the key things that Brad was mentioning was how we look at trends and not just one month over month. More important I think is the fact that we still see growth in this month over month. The rate may have slowed but we have to remember that the bar keeps moving each month, so even though the rare growth maybe slower for that one particular month, it’s still more activity or greater than what we had experienced the prior month.

Lew: I have a question Tony regarding the 2 reports, non-manufacturing and manufacturing. Is there one that one that is a leading indicator over the other, meaning the non-manufacturing? Would that have an effect now that would affect manufacturing data or are they on the same par?

Tony: That’s a great question. Historically, one of the things I have said on the record is that manufacturing tends to lead in to both the good times and the bad times, whether it’s going into a recession or out of recession. If you look historically, manufacturing has led the way and it stems from just how far upstream they are on the supply chain and activity wise. Even though it may not be the large percentage of the economy it still is the leading indicator and we’ve seen that trend from 2007 on and prior to that. It just depends on how you look at it, but I can tell you historically that’s what I have seen and so when I look at Brad’s numbers, even though I look at them being mutually exclusive it does give me a snap shot of what I might see and if they are tending to have a positive trend then that bodes well for non-manufacturing. It’s all up to your interpretation as well Tim or Lew.

Lew: Well I have a secondary follow up question to the same topic. The non-manufacturing new orders went up almost 5 points to 58 and yet the manufacturing new orders went up 2 points to just short of 57. To me it looks like non-manufacturing is improving significantly better than the manufacturing so would there be any effect down stream to manufacturing as a result of that or is this the result of what happened in manufacturing a month or 2 ago?

Tony: That’s a great question and all is contingent on cycle time and there tends to be longer cycle time in the manufacturing process than there is on the non-manufacturing. Again you’d have to break it down into specific industry segments and the respective companies that make up those industries which we don’t get into that much level of detail in this report. However, looking at it, you have to be careful in putting a numeric value to each of this index. But with new orders for the month of April at 58.2 it’s not too far away from the 56.9 on the manufacturing side as far as that rate of growth month over month. The trend has been 57 months for non-manufacturing and 12 months for manufacturing, but in looking at it I feel that the new orders could be anything from, as we talked about earlier, services being provided to manufacturing companies. So, I think it bodes well and it crosses each of the different sectors and so again, not to be repetitive, the cycle time for new orders could be a month or two versus a longer cycle time on the manufacturing side.

Brad: Let me interject and add something to this radio audience. Tony is speaking to the April 2014 report, the most recent non-manufacturing report and I am speaking to the May report. That is because the next non-manufacturing report is not released until tomorrow. So there is a little bit of a time gap in terms of that and comparison as well. But again we do look at trends in addition to the monthly numbers.

Lew: Brad, just to goad you on that point in terms of trends. We were talking with Tony earlier before the show and his feeling was and I want to see if you are experiencing the same thing in manufacturing, but this recovery, although real recovery has been one slow but steady climb out of a very deep hole. Is that what we are continuing to experience?

Brad: Yes, slow and steady and I must say there was some bumps in the road, some fits and starts and certainly some consternation for all of us along the way. I think the last time we talked it felt like that and that was with respect to the semi-annual report that we publish not quite a month ago from Vegas. We felt like we had a little bit more solid ground underneath us and I think we have to be careful about that but from a manufacturing stand point. This year is going well in terms of a continuous growth trend and also now with the 55.4 as the PMI up half of a point from last month. We see month over month increases in the PMI for each consecutive month from January to May and so we are seeing some good data points and we are seeing a good trend on top of a trend, if you will.

Tim: Brad, just to throw my 2 cents in as a manufacturer of the group. I had an opportunity to speak to Tony before the show. We have been as I mentioned earlier, tracking ISN for years and it seems as though the metals industry or at least my side of the metals industry, tracks almost in sync with those on the manufacturing sector of your reports and that being said we have been like everyone else. We have been slowly clawing our way back up. However, the last 3 or 4 months it had some significant changes in new orders and new business. This was based on the fact that in particular some of the larger manufacturers that we get orders from have been telling us that they have been getting funding for projects that they have had in their pipeline as much as a year ago. But they are now getting the sign offs to make the purchases and start the programmes and we’ve seen that in the last 3 months. The good news about that is that, it is happening at the time when we are going into the summer months, in which we typically see a down turn particularly in July when some people are on vacation. We have seen this uptake and we are feeling a bit more optimistic than just guarded – we are feeling pretty optimistic.

Brad: Let me chime in. I think Tony and I have very similar numbers in the area of capital expenditure forecast out of our semi-annual report that was announced just under a month ago from Vegas. Getting annual report designs right is so critical as it means that a business can convey facts and figures effectively and, with assistance from experienced professionals, we managed to do just that with ours. I think it addresses exactly what you are talking about in terms of your data point. On the manufacturing side our ‘?’20:56 is expected to increase 10.3% points from the forecast and that’s up from our original forecast for the year stated in December of 8%. I felt the increase represents confidence on the part of the finance organization, the CFOs in particular, to open up the purse strings to approve those products which meets the threshold.
Lew: So good news. Tony, in talking to you before the show, you were involved in a number of different enterprises in addition to what you do at the Institute of Supply Management. Why don’t you share with our audience your experiences with your operation and the economy out there?
Tony: Certainly, thank you. One of the businesses I own is a health care business. It’s a home health agency and from the end of 2013 to now we have seen some tremendous growth and it’s all related to what Brad was saying. He was reading my mind and I was reading his mind and looking at what’s going back into the economy from people reinvesting and companies reinvesting. I am doing it in my own business, I am seeing companies doing it, our respondents are speaking about it as well and that is derived from increased confidence. Back to your question, some of the other businesses that I have, I am starting to see more foot traffic. I own a restaurant and I have seen covers go up week over week, month over month. I see people out more frequently and this was not the case last year or the year before as everyone was keeping everything close to the chest. The discretionary spending even if they had the money; they were not going out there to spend due to the uncertainty and regardless of whether these businesses were in an affluent area or not, it was just all about that consumer and business confidence.
Lew: Now I know that your report has, Tony, if I read it right, 11 different break outs and if I remember Brad’s correctly there are10. The first 5 are used before generating the purchasing managers’ index number that everybody waits with bated breath on. Is that similar in your report, the first 5 or 6 that compile together to generate the number?
Tony: In non-manufacturing there are 4 indexes that make up the composite index and they are each weighted equally. The background on that is 6/7 years ago we didn’t have a composite index for non-manufacturing. We wanted to get enough historical information, and we sat down and modeled it in going back retroactively and looking at it to how the GDP trend was and so looking at which index would be most represented and how would we weight those and that was: business activity, new orders, employment and supply deliveries, each weighted at 25%. That’s how we came up with the composite index or the NMI as it’s called in non-manufacturing.
Tim: Ok, ok. Well that’s very good and I certainly would encourage our listeners to go to www.ISM.WS and if you go to the upper left hand corner of their site you will see this in gold, ISN report on business. When you click on those you will see the 2 different reports and a whole series of other reports that you can get into. These are all available to the general public in manufacturing and non-manufacturing, great information. I know that Lew’s company has followed us for over 40 years. It’s been spot on with the manufacturing report on business, purchasing manager’s index. If that’s headed up, his business is softening, so I know that he has an enormous amount of confidence in this report.
In terms of your latest report Brad, I know that this is a build up each month. Why don’t you give us a quick overview and then we are going to a commercial break in about 2 minutes. So give us an overview of the report that just came out.
Brad: Great. Let me speak to the headline number of PMI itself as well as the 5 supporting index that go into it equally weighted at 20%. First, the PMI of 55.4 of the ‘?’26:09 of last month. By the way the PMI also shows that the individual industry PMI show that 17 of our 18 industries are recording growth for the month of May; one industry is standing fast and no industry is reporting a contraction. So 55.4 is a solid reported number. New orders at 50.9 are up 1.8% points from last month. Production we spoke to at 61, up by 5.3% points. Employment at 52.8, is a nice growth number. It is down by a 9.7% point, but nevertheless growing just at a slower rate than last month and supplier deliveries at 53.2 that’s down 2.7%points. Anything above 58 indicates that deliveries are slower than they have been and that represents tightness in the supply chain but it’s not quite as tight as it was last month, which is good news. Finally inventory of raw material at 53 is unchanged from 53 recorded last month and represents a solid inventory position in an environment where we see and anticipate a continuation of solid new orders.
Tim: Great thanks, Brad and when we come back from commercial break I am going to ask Tony to walk through his numbers in his report because we have not done that before. We are going to take a quick commercial break and we’ll be back in 50/90 seconds or so.
Welcome back, we are talking today to Brad Holcomb who is the Chair of the Institute of Supply Management Manufacturing Business Surveying Committee and Tony Nieves who is the Chair of the institute of Supply Management Non-manufacturing Business Survey Committee.

Now while your report comes out tomorrow, why don’t you give us and our listeners an overview of the report that came out in April so that when they see tomorrow’s report they will have a better handle on it.

Brad: Certainly. So when we look at April’s report with 57 consecutive months of growth that we have been experiencing in the non-manufacturing sector, the composite index came in at 55.2 up 2.1% points, we’ve had a trend of 51 months for the NMI for the composite. Business activity increase significantly month over month from March-April from 53.4 to 60.9 and that’s 57 months on that trend. We talked earlier about new orders and we look at the new orders index of 58.2 also up significantly for 4.8% points month over month. Employment which is a strong driver for this sector, came in at 51.3 which is down as far as the rate of growth is concerned, 2.3% points down from the 53.6 in the prior month and we had experienced contraction 2 months previously. This is the second consecutive month of growth when looking at April for employment. Supplier deliveries are slowing ever so slightly, just over the 50 base line at 50.5, that’s down a bit and the inventories up from contractions from the prior month at 48% points up to 55.5 which goes hand in hand with why deliveries are just slowing ever so slightly and not on a much slower rate. I’ll speak a little further about that.

Prices up 60.8, this is driven in this sector of mostly petroleum based products, its fuel and a lot of overland trucking involved in the non-manufacturing sector. A backlog of orders is at 49 down from the 51.5. There was no backlog; you can see the inventory build up to the 55.5 didn’t impact on supplier deliveries all that much, those 3 are all inter-related. So they would seem to be a buildup of inventory, some burn off of the inventory, some burn of of inventory as well. So that’s how that all evolves into the numbers that we are seeing. Exports up 57% from the month of contraction, up substantially and imports also 55.5.

Getting past the international holidays especially in Asia, an inventory sentiment which is an industry referring to manufacturing or non-manufacturing, It is based on how the respondents feel about their inventories and about how they match up to the level of business and if it’s 65% you feel that your inventories are too high. We also ask our respondents to give us some comments and there is one comment in particular that goes to a question that we were addressing prior to the show today. In regard to the retail trade, in one of the comments that I extrapolated which I think is very reflective of what’s going on in this sector. We are experiencing a pickup in sales which has brought a little optimism that we may have seen before and things could be turning up. We are making investments to take advantage of the upswing to leverage as many sales options as possible. Again that came out of retail trade and its reflective of what our respondents’ overall feel that the economy and business conditions are improving.

Lew/Tim: Ok, great, I appreciate. Tony one other thing, if you could go over the industries and use a survey to put this report together for our listeners, I think that would be helpful.

Tony: oh, certainly. There are 18 industries that make up the non-manufacturing sector: arts, entertainment and recreation, wholesale trade, agriculture, forestry, fishing and hunting; retail trade, construction, public administration, accommodation and food services; educational services; transportation and warehousing; financing and insurance; management of companies and support services information; real estate rental and leasing; utilities; other services; professional scientific and technical services; health care and social assistance; mining.

Lew/Tim: Mining, if you could give us clear rotations because to our neophyte minds, mining is a manufacturing event. How does it end up in a non-manufacturing?

Tony: Well you have to look at how its determined, what is truly manufacturing and industries could partake in parts of manufacturing process or parts of the non manufacturing process but you have to look generally, what the output is and are they truly mining. To me mining is taking raw materials and selling them somewhere else and someone is taking these materials and transforming them and going through the manufacturing process to have an output of a finished product. You know the same could be said for some other type of industry on the non-manufacturing side, but categorically that’s what it is and that is the true nature of what is being performed. It’s mostly a service of extracting raw material out of the earth, the same thing on the construction side. It’s labor intensive and someone else is taking it and transforming it through the manufacturing process to a finished product.

Lew/Tim: In that respect Brad, your report talking about manufacturing, for instance keep your manufacturers and in some case those who were creating goods for retail sale that would be measured in Tony’s report. Is that right Brad?

Brad: Yes, we address, as Tony said, transforming raw material into a finished product and then providing those with the next step down the supply chain if you will. Again I think the key is transforming raw materials into finished products.

Lew/Tim: Ok, that’s the definition you would give to the manufacturing, it’s the conversion of raw materials into finished stuff.

Brad: Yes, yes and like Tony we follow and include 18 different industries as well and their label speak to manufacturing, for example I’ll just give a couple: wood, paper, food and beverage and tobacco products. We were talking about the production of products if you will.
Tim/Lew: Gentlemen, I don’t really know who should be addressing this question and I have a feeling that you are going to tell me that you are not forecasters or economists, but I am going to take a shot at it anyway. We are hearing, from the metal industry side that we are in, the cost of materials has been going up rather significantly. For example, the nickel alloys and chrome and lithium which goes into a lot of the super alloys and the more expensive grades of material. We are hearing numbers like 18% for nickel; 42% for chrome, 3% for millet and it seems though that this trend has started in January from the information that you gather from your responders. Do you have any insight into where this is going?
Brad: Let me try to give a partial answer here and to point the audience to our manufacturing report. On page 3 we often list the commodities that are up in price as reported by our panel, commodities down in price and commodities in short supply. And aside from the list that I have, there might be a parenthetical with the number and that number represents the number in consecutive months that particular items has shown up in the list. For example, talking about smaller commodities, we see stainless steel, up this month for the third consecutive month. Steele up for the 6th consecutive month since the ‘?’40:45 of ‘?’ and ‘?’ up for the second consecutive month each. Nickel is up for the third consecutive month. So this is very consistent with what we are saying. What we don’t provide through this report is the actual degree of increases in terms of any forecast. We would simply rely on the last semi-annual report released on May 6th, in which it is forecast price increases for the whole year on the manufacturing side in terms of raw materials at a modest 1.5% points across the board.

Tim/Lew: The London metal exchange runs almost in parallel with the commodities in the price list that you just went through. But if you look at the graph, charts which show the various commodities and how they are moving, the trends (I am not an economist or a forecaster either) are a bit concerning. And to see the graphical change that is happening, as a novice taking a look at it, it certainly seems that the trend is going to continue for some period of time on an upward track. Brad?
Brad; Yes, and in addition we take specific verbatim comments from our panel and I sort through hundreds of them to present minor ‘?’42:43 each month. The ‘?’ that we report this month talks about supply and pricing issues. For example, specifically a fabricated metal product, that segment, the comment is: ‘steel bar is required for automotive application are in high demand, supply is very tight and prices are increasing.’ Another one from the food, beverage and tobacco products industry: ‘increasing demand for products is creating supply and sourcing challenges.’ So here is the old supply demand equation presenting itself and certainly it will ever know a broad variation across the spectrum of commodities and hopefully our report will help to track some of those for people interested in this commodity.
Lew: Tim? Now Tony I know that your report have a similar section because these reports are laid out in a very similar way. Commodities are on price, commodities are down in price, commodities in short supply and one of the things that Brad’s been very helpful with our audience is going over the report so that the reader understand the incredible depth of information that is here. Is there something that you would like to share with our listeners as we approach the end of the show about your report overall?
Tony: I would like to just say that we have been talking about prices here for the last few minutes and there is some overlap as it relates to the commodities. One thing to keep in mind is that these commodities that are coming through the manufacturing side and the total cost increases are not always passed through the supply chain on to the end user or the non-manufacturing company and for instance, when you look at the breadth of products that are in the non-manufacturing side. There is food commoditities, building materials, and chemical products. I mentioned fuel or petroleum based products earlier, and then there is labor and right at the end of this is the famous steel as was mentioned by others this morning. So when you look at how the inter-relationship, there is quite a lot of intricacy and key components to these different supply chains that make up the overall manufacturing and non-manufacturing sector.
Tim: Ok, well I will certainly encourage our listeners to go to www.ism.ws, to pull down these 2 reports and look at them and as Brad has always encouraged, these are excellent reports. There are other reports out there, review lots of the information as you begin to build your strategy here. Lew, before we wrap up the show we have made a change in the show that you want to share with the listening audience. Why don’t you tell them what’s happening to the future of MFG Talk Radio.
Lew: There are a lot of new plans for the company, but not all that I am willing to talk about right now. However, we are now on weekly – every Tuesday at 1.00 pm EST, and our production department will be good enough to have our show archived today by 5.00 p.m., in case you tuned in late. There is a lot of good information there. This is our 17th show, we are getting a lot of good feedback, I believe our listener-ship is up to 45,000 which is quite incredible considering we are only on the air for the last 7 months. We continue to keep moving forward. We have a list of some very interesting people coming on over the next couple of months. We hope that Brad will continue to be one of our regulars, and Tony your contribution today was certainly welcome and interesting to see how a non-manufacturing report really has a lot of manufacturing components to it, so if you are available to be on our show it would be nice to have you as well. Tim?
Tim: Brad, I’d like to thank you again for being on MFG Talk Radio. You’ve been a wealth of information on a regular basis which I think have really helped our listeners in manufacturing. Again thank you for being on today’s show.
Brad: Always my pleasure, thank you.
Tim: Tony thank you for joining us. I think the interaction between the 2 reports and you 2 gentlemen who do an enormous amount of research in compiling with your teams to put these together has been very beneficial to our listeners and I was always curious because Brad has always referred to manufacturing as being 11 and 12% of the economy, thus non manufacturing would be the balance. Would that be correct Tony?
Tony: It would. It doesn’t mean Brad is any less important.
Tim: Certainly and I would agree that manufacturing has led the country out of every major and minor recession since the great depression and Brad may even say before that, because he’s been measuring it longer than that. So thank you again gentlemen for being on our show and that wraps us up today for MFG Talk Radio.