S1-E5 Transcript ISM PMI

s1-e5MTR

 

Host 1:    Welcome to Manufacturing Talk Radio, the only show that takes a look at the obstacles and opportunities open to small to mid-size enterprises to manufacture at America – brought to you by All Metals & Forge Group, with your host, Tim Grady and Lou Weiss. Hey, guys!

Host 2:    I want to wish you all a Happy New Year and I’m glad to be back starting a fresh new rosy year. At least that’s the way it’s sounding by the most of the prognosticators. Talking about our post group from the last show, Brad Holcomb gave us, again, a rosy view of what’s to come down the road. There are other reporting mediums that are even reporting as far down into 2015 that looks pretty good.

One of the comments that were made by Brad Holcomb two weeks ago which we now call the Golden Nuggets, that refers to a comment or statement that is made that’s really very important to a small to medium-size enterprise listeners and basically, this particular Golden Nugget that Brad was talking was about the five points that a buyer looks at in regards to his vendors and how he chooses his vendors.

I’m not going to tell you about the five points, but you can go back to Manufacture mfgtalkradio.com and you can listen to that show. It was the show that was on the 16th of December. So that, moving along, I do want to mention that you can sign up and send in email questions to us during this broadcast through live@mfgtalkradio.com and we’ll happy to air some of your questions time allowing, and other than that, Tim?

Host 1:    Well, Brad. Welcome back to the show and Happy New Year to you, sir!

Brad Holcomb :  Well, Happy New Year too, to you and to all of our listeners as you alluded to. It looks like we’re in for a solid year in 2014 and hopefully beyond.

Host 1:    Yeah, it’s sounding really great Brad, and I appreciate the fact that you’re on. Kind of there’s a double header today. One is to talk about the 2013 wrap-up and the second is to talk about the December ISM number. So, why don’t we start with the 2013 wrap-up and give our listeners a feel for how the year went?

Brad Holcomb :  Now, absolutely, 2013 is characterized by two kind of different halves. The first half was pretty good, was okay. But the second half was with much better and more consistent and operating manufacturing at a higher level. December came in very nicely consistent with that. The number was 57.0, just three-tenths of a point below December but the second highest of the year and actually the second highest point since, I think, two and a half years ago.

Again, December finished out strong continuing the momentum of the entire second half of 2013. A couple of highlights of December: new orders came in at 64.2, the highest level since April, 2010 and employment registered 56.9, its highest reading since June, 2011. Again, it is a great way to finish off the year.

Host 1:    Yeah, it sounds like things are starting to finally chug forward. I know some of the things that we are reading are showing that the economy is picking up to a level that it has not seen since the 2008 downturn. I know that Lou has a question for you on something that we are picking up on the services sector and Lou, why don’t, you and I talked about it earlier today, why don’t you give Brad an idea of what we picked up on?

Host 2:    Well, the services area we haven’t normally spoken about, but I think it’s interesting that we do. The number actually came out this morning, if I’m not mistaken, Brad. That came out at 53, I believe, which is seemingly a downturn. I’d like to hear some of your comments on that. Again, we’re not talking about manufacturing for the moment, but I’d like to hear your comments.

Brad Holcomb :  Yes. First all, I want to mention that my colleague, Tony Nieves, former Chief Procurement Officer of Hilton Properties, is my counterpart and takes care of what we call non-manufacturing or you know, more popularly known as the services sector.

At 53.0 let’s keep in mind that services is still growing. That is, December was better than November, so 53 is a good number. It’s growing not just quite as fast as the previous month. And so I think that while it didn’t keep going up and up, we really can’t expect that from services or from manufacturing. Once again, 53 is a good number and we’ll just have to see how that plays out.

Host 2:    I do have a question for you, Brad, regarding the number, the PMI number this month that came out at 57 and that’s a drop from 57.3.

Brad Holcomb :  Right.

Host 2:    The news media has been projecting that. Well, that’s a great number and it is. The point is it was lower than the month previous. What does that typically mean to our listeners —

Brad Holcomb :  Right.

Host 2:    — about such a small drop?

Brad Holcomb :  It actually — and that’s a great question, first of all, because you know, for new comers especially this is a little bit tricky. 57 is a terrific number. What it means is that December was you know, sort of that much better, if you will, than November. You know, and November was better. Now, if we go back to, I think its June, we saw — let me just look at my table. Yes, from June through November, the PMI went up each month over the previous month.

You know, starting in June with 50.9 and then 55.4 in July and so on and so we got to November at 57.3. I mean, that was terrific, continuously you know, building additional momentum. But we can’t expect as I think I alluded to a few minutes ago, for things just to keep going up and up where we run out of runway. We do not want manufacturing or any part of the economy to overheat, and so 57 is a very solid number. It should interpreted as that it’s growing over November, just not quite as fast as November grew over October. Does that make sense?

Host 2:    Yes, it does and thank you. Actually I have an email question that had just come in from Richard in actually, your hometown, Dallas, Texas. The question is — and it’s already starting to delve into the numbers, and I don’t mean to jump the gun on you here, but we got the email. I’d like to be able to address it.

His questions is the new orders for the January report went up. Meanwhile, back log went down and he’s questioning, how does that work? Your new orders go up, but your back log goes down. There’s a part 2 to that. Let me throw it out at the same time from a different email. And that is that when the inventory figures also down, is that an indicator that being that new orders have gone up, and inventories have gone down that we can foresee additional inventory rises in the near future?

Brad Holcomb :  Yeah, great, great questions and it all works together. Richard in Dallas and I suffered 14 degrees after this morning. Thank you very much. He’s going to talk from Dallas.

Host 2:    We sent it to you.

Brad Holcomb :  Okay.

Host 1:    Okay. Well, we’re going to send it on.

Brad Holcomb :  You know, new orders is off. That’s really exactly what it says. It’s new business coming in and if you look at the list on page 3 if you will, we had 11 industries reporting growth in new orders in December and only one industry recording a decline. There were six that remained even. So, it’s very broad based and as I said, it’s the best reading in quite some time since April, 2010.

Now, back log of orders that’s going down. Back log is essentially old orders, whereas new orders is new business. Back log of orders are things that came in previously that manufacturing just hasn’t produced yet for whatever reason, and sometimes it’s for planning purposes. By that I mean manufacturing of course tries to maintain level production according to its employment and asset based.

Back log and new orders are somewhat independent or disconnected in time, if you will. Production works both on new orders and back log. Now, there’s the second part on inventory. 47.0 minus 3.5 from last month is still in a well-controlled area, but this is actually what I would call an unwanted decline in inventory and that is to say production is high. It’s queuing into the inventory and I’ll couple in another metric here: supplier delivery is at 54.7 up 1.5. That suggests that suppliers delivering these raw material inventories is slowing faster than last month.

Let me kind of rephrase that. Suppliers are having a hard time keeping up delivering raw materials inventories to manufacturing. That’s in part why you see that 47.0 number. Not a bad thing overall in the environment that we’re in of growth in momentum. It just means the supply chain is tight. Suppliers are chasing it trying to keep up and catch up. That’s a good thing as I said in this environment. And they will catch up.

So, it’s all good.

Host 1:    Well, I think that makes a lot sense, Brad. I know what I’ve been talking with Lou about All Metals & Forge Group or that what he is experiencing are customers wanting goods faster. But I think we’re hearing that kind of across the industry where delivery times are expected to be fairly short, shorter than we experienced in 2013. Is that showing up in your numbers as well in the ISM report?

Brad Holcomb :  Well, it’s certainly is, indirectly in what I’ve mentioned. There is a strong emphasis on manufacturing, on inventory control, and what many call vendor-managed inventories, you know, shortened lead times, you know, lean manufacturing, lean inventory flows, you know throughout the system.

And so, you know, absolutely and along with that we’ll use the word flexibility and nimbleness, definitely something that’s here to stay and continue in that direction.

Host 2:    I did notice, Brad, that under new orders, there seemed to be more of the heavier industries that are beginning to come online. Transportation, equipment manufacturing, machine rebuilders, primary metals, fabricated metals are becoming seemingly stronger. Is that your take as well?

Brad Holcomb :  No, I agree. I agree. You know, all of those related to you know, the auto industry. The auto industry you know, seems to really have had you know, momentum throughout the year and has carried this particular industries of you know, primary metals, computer electronic parts. There’s a lot of that in cars these days, transportation equipment which includes you know, autos, trucks but also airplanes and so yeah, definitely those seem to be you know, floating more to the top of these lists and continuing forward.

Host 2:    Brad, taking into account in December, Christmas and New Years and obviously on those levels of business tail off except for, perhaps, retail. If I’m not mistaken there is a cutoff point at which I assume is calculating your algorithms for the purposes of your report.

Brad Holcomb :  Right.

Host 2:    This was the last two weeks of the year. Is that included in your numbers that would reflect you know the downtrends but yet the numbers are all up?

Brad Holcomb :  Well, if it will be the answer is mostly yes. We do have an earlier cutoff point before the Holiday but at the same time, our panelists you know, have the data, have the information in front of them, which reflects their December. So the fact that they’re reporting it a little bit earlier really doesn’t make any difference. So, we consider this to be a view of December specifically and you know, the timing of the reports is somewhat incidental.

Host 1:    Brad, was there anything in the report that to you this particular session was a surprise?

Brad Holcomb :  A lot of pleasant surprises, if you will.

Host 1:    Oh, good.

Brad Holcomb :  Now, that — is this the PM — I mean, the whole thing is so well balanced it’s just nice to see us putting 2013 away on the shelf in such good order. So, pleasantly surprised would be my first comment. Secondly, I didn’t really see that inventories would drop by 3.5 points, but I certainly understand it. And I think I’ve mentioned that that the suppliers are having a harder time keeping up.

So, no real surprises in any negative sense at all. That’s also you know, the positive nature of this not only comes through in the data, which is always you know, the first thing that most people look at, but also it comes through in the comments that our panelists provide us, and they provide hundreds of comments and I sort through them and try to pick about 10 from 10 different industries that are representative and those reinforce the numbers but they also are a little bit more forward-looking than the numbers per se in there’s hints about what they’re seeing you know, on a go-forward basis.

As we look at those comments, it’s all good as well.

Host 2:    Brad, in the report you also report on new export orders. What is the export percentage of our GDP today? Are you up on that number?

Brad Holcomb :  Actually I, we don’t have that number and it’s not something that we inquire about as part of our process. This is a good time to — when questions like that come forward, there’s a certain nature to our report. It’s simple and clean and it allows us for a very timely report which is, you know, highly correlated with a lot of government statistics and so and so forth.

In its simplicity there are certain things that we don’t have. Right? But what we do have, is we have a sense of where manufacturing is from month to month as well as on a trend going forward. In particular, we don’t break out domestic business and export business per se. Although, having said that, if our listeners will go back to the December 10 semi-annual report which we did a show on the 16th there is a list of things that our manufacturers are thinking about and its’ almost you know, problems are opportunities and there in that special question, we ask them about domestic business, essentially, how important is that, international business, how important is that and the domestic business is rightfully you know, on their minds to a degree twice that of the international?

It kind of gives us a flavor of the fact that domestic service certainly is the majority of stake here while international business is so very important as well.

Host 2:    For the next show, Brad, I’ll have the number for you, just in case you have any other wise guys asking you that question.

Brad Holcomb:  Right. I keep reminding people that I’m not an economist, thankfully, with all deference to economist friends. I’m engineer, and I try to really focus on what’s in front of me on behalf of Institute for Supply Management.

Host 1:    Well, Brad, we’re going to take a quick commercial break here, and then we’re going to be back because I’d like to talk to you about this report in a little more depth.  So we’re off to a commercial.

Welcome back. This is Tim Grady. We have with us Brad Holcomb from the Institute of Supply Management, and Lou Weiss, from All Metals & Forge Group. Brad, I know that we had spoken with you in the previous shows, and in this report, which our listeners want to pull it up, and it’s at ISM.WS. It’s the report on business that I can see in the upper left hand corner of that homepage.

Those first five categories, new orders, production, employment, supplier deliveries, and inventories really are what you use to calculate the PMI of 57.0. Is that right, Brad?

Brad Holcomb:  Yes, that’s correct. Then they’re all equally weighted at 20% for the last many years.

Host 2:  Okay. We have had the inventory settled up. The PMI could have really taken a pop. What is the highest PMI you have seen, Brad?

Brad Holcomb:  The highest?

Host 2:  Yes.

Brad Holcomb:  In the low 60s, and that was actually, I believe, in 2011 in the first half of the year, very low 60s, just above 60, and when we reached these in like this last year, we go back and work with the department of commerce to seasonalize these first five metrics and take the seasonality out. Those numbers of just above 60 actually fell into the very high 50s, so there was a little bit of work down there which we, as I said, do every January. That’s the PMI specifically. So being in the high 50s right now is, again, a very strong position.

Host 1:  Is there a point in the PMI that which you think is getting overheated?

Brad Holcomb:  Well, as I look back on that first half of 2011, there were four consecutive months just about 60, and I thought that was initially very exciting, if you will. But then the second half of the year almost fizzled out, sort of the reverse of what we experienced in 2013. So in hindsight, I felt that those 60-ish numbers represented some overheating and kind of getting a header of ourselves, not just the manufacturing, but as in economy.

Host 1:  Okay. Now, employment, I know everybody is kind of watching the employment figures. It looked like that’s starting some positive momentum as it did through 2013. I’m trying to recall from the December forecast, is that expected to continue to move up as the economy heats up?

Brad Holcomb:  Yes. I’m sorry, I don’t have that semi-annual report directly in front of me. However, we do comment on how employment sort of settled out in 2013, and it was less than 1%. In 2014, I’m going from memory, it’s around 2% or just a little more than 2% as in expectations. So definitely increasing this December number, as I said, is the strongest number since June of 2011, so I expect this just to keep going, and when you see numbers like this, it represents — and I think our audience will appreciate this confidence on the part of manufacturing, broadly speaking, to bring on more people in anticipation of a continuation of a strong new order book.

Host 1:  I know that you also asked in the report special questions, and I’m not sure we’ve touched on that a lot in our radio shows with you, but can you explain those a little bit to our listening audience?

Brad Holcomb:  Yes. Sort of generally, and again, I apologize. I don’t have that semi-annual report in front of me. I should have, but I’m out on some other errands this morning and just kind of running fast here. But we asked two special questions. One is, what are you going to do in 2014 to improve you supply chain operations? And the answers include as the number one item, strategic sourcing and refining that supply base. This comes up pretty much every year for the last several years, but even more so this year is looking closely your supply base, narrowing it down to those that are really performing for you, exiting those suppliers that aren’t working out and being much more demanding, if you will, that suppliers perform extremely well because if your current suppliers aren’t, then somebody else is there ready to step up and perform for you. As you alluded to early in the show, we went through the five dimensions that I’ve always used in a philosophy that I call total customer satisfaction. That we want to make sure that our suppliers are up to the task of performing in all five of these important categories.

So that was number one on the list. Another one was supplier relationship management, or some would call supplier performance management. Once you get those suppliers that you want onboard, then you want to manage their performance by indicating specific expectations and measuring their performance against expectations. It’s to me it’s no different than how we deal with and treat employees of our company. We give them goals, we give them expectations. We give them performance reviews, et cetera.

I’ve always done the same with my suppliers and I see this as you know, top of mind and top of the list from the panel overall. And so that’s the first question. What are you going to do this year to improve your supply chain? And there are other things on that list of five or six items that our listeners can go back and look at the report.

The next special question is you know, what kind of — I’m paraphrasing here, what keeps you up at night as far as 2014 and looking forward:? In other words, what do you have to have that really needs to go well? Okay.

So, on the top of that list, I alluded to it earlier was domestic sale. I really need domestic sales to be there. Number 2, and to improve of course and to grow. Number 2 on the list was international sales. I think to — you know, and the total of this list of — let’s say 7 or 8 items had up to a hundred percent domestic sales is 33%; international sales was about 18%.

Again, I’m going from memory. And then, the next couple on the list was interesting. Healthcare reform uncertainty.

Host 2:    Uh-huh.

Brad Holcomb : So, I mean, companies just don’t know really don’t know what to make of it, yet. Right? Another separate one on the list was healthcare cost. Right? So, reform uncertainty in healthcare costs are another couple of items pretty high on the list.

And then that list is rounded off by you know, inflation and taxes. Those are kind of the last two on the list. You know, people aren’t too concerned about inflation. They’re not concerned about you know, change in taxes.

Another one, sort of in the middle of the list is Washington. You know, continued discussion, debate, uncertainty about debt filling, budget sequestration, all those kinds you know maturations that they’ve manage to come off within you know, hopefully, knock on wood. We won’t have much of that. This will take care of business but who knows?

Having said that, a little bit more the same in manufacturing just keeps moving forward, listening to their customers versus listening to Washington.

Host 1:    Okay, that’s also what we’re sensing. I think the current number floating around out there is that there’s something like 7 trillion dollars in cash that corporations are just sitting on because they’re so nervous about Washington and what they’re not doing. But they don’t feel like they should be investing in their operations.

Or they’re just kind of sitting back. Yeah, even in the phase of what now appears to be some pretty strong numbers out of ISM. So, it’s going to be interesting to see what those corporations do here come the first quarter of the year.

Brad Holcomb : We are predicting in that and I’m sorry to jump in, but we are looking at the December 10, semi-annual report expecting an 8% increase in capital expenditures in 2014 relative to 2013. And 2013 wasn’t bad either at about 12% prior to. And this is again, 8% in 2014 on top of a pretty good year of 2013 in terms of capital expenditures.

But that’s also a number that is pretty dynamic and it’s dynamic according to you know what happens in the economy especially what happens in Washington, you know, removing the uncertainty. Business keeps moving forward and the CFO’s will continue to open those purse strings.

Host 1:    Okay. Yeah, that makes a lot of sense. We’ll take a look at that as we move forward in the future shows. And now, these next five areas: customer inventories, crises, back log of orders, exports and imports, explain those to our audience again if you would.

Those are kind of they’re standard within the report. They don’t impact the PMI number, but they’re kind of those other areas that you look at.

Brad Holcomb : Absolutely, they’re supporting metrics. They provide additional insights and information but as you mentioned they’re not factored specifically into the CIM.

So, starting with customer inventories, that represents finished products which is either at the end of the manufacturing line or in the customer’s possession or somewhere in between at the warehouse. It sort of depends, but it’s all of the finished product that manufacturing produces and to have a number that’s below 50, we consider those inventories to be too low and therefore, we would expect that some restocking energy there and that’s why a number of 40 or 47.5 is a good number. We like to see it too low because it suggests restocking is necessary.

Prices, just in general, represents prices of our raw material as inputs to manufacturing. And of course anything above 50 represents increasing. This is actually you know a fairly modest number of 53.5 to think overall prices of raw materials for the entire 2013 as we recap in that December semi-annual where it’s less that 1% is going to surprise everybody, and for 2014 we expect it to be in the 1.6% range again a very modest price increase for raw materials overall.

Now, back log of orders it is essentially old orders that are still in the queues that haven’t been produced yet. There’s always some level of back log that allows manufacturing to balance production and it’s always prioritized to try and meet customer needs and provide that total customer satisfaction, as I referred to.

When it’s growing it’s kind of good thing. You don’t want it to grow too much or too little so up or down around the 50 mark is good territory. Export –

Host 2:    Brad in relation to what you’re just referring to, we have an email from Fritz, from Michigan questioning the PMI 42 number. That is somewhat explained in your report. Can you go on to some detail about that regarding the entire economy?

Brad Holcomb : So, Fritz. It’s freezing in Michigan.

Host 2:    For sure.

Brad Holcomb : I mentioned that we work with the Department of Commerce every January, right about now and we do a number of correlations and one of the correlations that we do is between the PMI and GDP. And what it shows is that for the last year going forward and that’ll change in January as we see the January numbers in early February, but for last year, any PMI in excess of 42.2 you know, over time, generally indicates an expansion of the overall economy, in other words, GDP. And just kind of continuing down through that section of the report, on an overall basis, our PMI January through December average was 53.9 and that corresponds to a 3.7% increase in the real domestic or gross domestic product. And I think that’s right where a lot of the government data is coming out adjusted higher from their previous expectations right around 4%. So you heard it from us first.

Host 2:    Thank you for that Brad, and I think we’re taking time now for a break and take it away.

Host 1:    And again, a big thank you, to our sponsor, All Metals & Forge Group. Your best source for open die forging and seamless road rings and alloy, carbon, stainless and tool steels: Nickel, aluminum, titanium, copper, you name it. Just go to steelforge.com. Send up your request for quotes and they’ll get back to you quickly and concisely.  That’s steelforge.com.

And now back as we wrap up our show.

Brad, I just want to remind our listeners that if they go to ISM.WS under publications and news, they will find the link. It says, latest news and press releases 3rd one down, to December 10, 2013, economic growth continues. This is the semi-annual report, if they’re looking for it. It has a great wealth of information and the ISM report on businesses on the upper left hand corner of the homepage. So for our listeners who are looking for information that’s where they can find it.

Brad in this latest manufacturing report, let’s just touch on for the moment as we did with 2013-14, forecast. How is non- manufacturing looking?

Brad Holcomb : Non-manufacturing is looking good. I would say that, you know, let’s also put things in perspective. Manufacturing in the United States represents about 11% or 12% of gross domestic products. Non-manufacturing or services represent everything else, so 88 or 89%. So it’s enormously important and that has clearly shifted over the last couple of decades. Manufacturing has kept getting bigger and bigger, but less of a proportion of total gross domestic products. So services is everything else and enormously important, but it’s our newest index. It was brought up by the Institute for Supply Management. It was created, I should say, I believe in the 90’s. And so it has a little bit less history and for some reason, the journalists and others seem to pay less attention to it. I personally think they should spend you know more time with that and at least give it equal time.

So that’s a little plug for my colleague Tony Nieves in the services report. Again, I don’t have the detail in front of me, but it’s had a good, good year in 2013. I believe consistently above 50, if I’m mistaken, a little bit more variability, volatility in the last three to four months. But I think if you go back three months it was at a high point and it’s dipped down a little bit. But again, anything over 50 represents a growth relative to the previous month. If the number is down, it just means it’s not growing as fast as the previous month over that previous month, if you will. So at 53, which was reported this morning, still is quite solid, but perhaps it’s still looking for a momentum, more so the manufacturing.

Host 1:  That’s interesting. I know that Lou got an email. It just came in. Lou, who are we hearing from?

Host 2:  Clyde form Chicago. It looks like we’re going to go back to talk about international sales, actually, sort of making a speech and kind of ending it with a question. Clyde has improved his manufacturing business by going out in the international marketing place to find an easier way to find new customers and to prove his business. Do you have any additional insight into the international market? I know I asked you earlier about the percentage about the percentage of GDP which you don’t have and I’m going to get for you. But do you have any additional comments relative to Clyde’s comments in the international markets?

Brad Holcomb:  Yup. I think from what I see and looking at reports from Europe, for example, the December-Euro zone PMI was up, and Germany in particular, was up in December. I think China was kind of holding its own plus or minus, still in the 50 plus range. So it feels like Europe is starting to reach some level of stability where it’s been you know extremely volatile and recessed for the last few years. It kind of looks like there’s more stability, and I think that ultimately, the U.S. economy is a reflection or microcosm of the world economy.

So from what I see and hear and honestly feel, it’s a great time to reach out. Be optimistic. Try to diversify your customer portfolio and go out there and look for a new business, because I think it’s out there for the taking. I bet Clyde’s doing it, great job and thinking in that direction.

Host 2:  Great response, Brad. I thank you. I know we’re coming near the end of the show, and I just wanted to thank you again for being with us, and wishing you again a Happy New Year, and I do want to make one comment. For those who did not hear the whole show, that we’re trying to break our production departments record, and we are giving him 22 minutes till after the show to have it live on mfgtalkradio.com. And Tim?

Host 1:  Okay, thanks, Lou. I think our engineer did jump out the window, so —

Brad Holcomb:  Twenty-one minutes next month.

Host 1:    I think you got it right. On January 20th on our show, we’re going to have Phil Paranicas of ThomasNet, and he will bring us some exciting information. So tune in on January 20, at 2 o’clock Eastern Standard Time. Brad, I would also like to thank you for being on the show. You’ve been a terrific guest and the information that you go into in-depth, which we don’t hear in the media, because they don’t have the time to crawl into this report. It has been terrific for us.

Brad Holcomb:  Well, it’s always my pleasure. Thanks for having me.  I wish everyone listening, and you folks, a Happy Year.

Host 2:  Thank you so much.

Host 1:  Lou, thank you for continuing to sponsor Manufacturing Talk Radio.

Host 2:  It’s my pleasure and fun, thank you.

Host 1:  Great. That’s it for today’s show. We’ll talk to you in two weeks, on January 20th at 2:00 p.m.