S1-E9 Transcript ISM Report on Business

s1-e9-MTR ISM Report On Business Feb 2014

Tim: Well, hello everyone and welcome back to Manufacturing Talk Radio, how are you doing Lew?

Lew: Hanging in there!

Tim: We are looking forward to hearing from Brad Holcomb today and he is going to talk to us about the ISM Number but before we get to that, Lew you have got some updates from the last show and what’s going on in manufacturing in America.

Lew: We will start off with a few news tidbits that have occurred since the last show and I’d like to just go over them for a few moments and then we will do the post script from the last show and we will then take it away. Over the last 2 weeks there has been some interesting sets of numbers coming up at the beginning of the year.

Jay Timmins CEO of the National Association of Manufacturers represents the largest manufacturing association in the United States which also includes about 12M workers and about $2 Trillion into the US manufacturing economy. They feel as though that America is coming back, they’re feeling as though that we should be focusing on product, people and policy and the bulk of the policy issues that have to do with the way our government is dealing with regulations on small-medium size companies and these are issues that need to be addressed and a lot of these associations are taking a leadership role and trying to work with the government and making it easier for people to do business weren’t difficult.

Number 2 which is good for some and bad for others, numbers came out about China manufacturing and HSBC Bank came out with their number at 48.5 which was put together by the China Federation of Logistics and Purchasing stated that there’s trouble in yellow -–02:46:6—. There are some good things happening there as far as the United States is concerned for the future. It seems as though that there’s this comeback where businesses are coming back to the United States manufacturing business, so that’s a good point for our country. The National Association of Manufacturers on Monday came out with a revised 2013 4th Quarter number showing that we had gone down to 2.4 down from the 3.2 projected, claiming most of it on Uncle Sam and lack of spending.

We seem to can’t get that right even we spend too much over not spending enough. Seems as though weather may have had something to do with a bit downturn and perhaps Brad will be able to give us some insight to what’s the number will look like for the 1st Quarter of 2014 because of the weather. I hope that’s one of his expertises.

Last show we have a post script just to bring you out the speed as to what that show basically was about in case you haven’t heard it or seen it, I guess you haven’t seen it or heard it. You can go on to our website at mfgtalkradio.com and listen to it or download it and you can hear the whole show. Our guest that was Chris Rallo of TDBank – Vice President of Commercial Lending and we went in to a lot of discussion about the financing and lending and manufacturing and how the small to medium size companies can try and enhance their financial condition and cash flow and so on by taking a serious look at the bank lending as a strong possibility. Tim, I think that kind of brings you current to introduce our guest.

Tim:  ——04:47:4——- Lew, I appreciate that there are some interesting tidbits and I know that Brad maybe want to comment on some on that, Brad give us an idea of what’s going on with the ISM for last month and anything you can share with us on what’s going forward?

Brad: Great, glad to be on again and I have the opportunity to talk about the February Manufacturing ISM Report on Business, it’s a good report with the PMI up 1.9 percentage points over January, that indicates more growth than January and new orders kind of led the way with an increase of 3.3% to 54.5% and I still see number for new orders but weather certainly did that have an impact from angle here including comments from out panel as well as inside the numbers and  we will try to fix that apart as we go along today.

Tim: Okay, great, what would you like to tackle first, the number itself or I let you choose, this is such a terrific job putting together  this report that contains so much data it will just go from top to bottom and we had Brad kind of walk you through.

Brad: Yes, I like to look at the manufacturing at the glands cable in our report which everyone confined on the ISM website at ISM.ws. The manufacturing at the glands cable for February 2014 kind of shows the big picture as well as the underlying metrics that go into the PMI and other supporting metrics, how they are doing relative to January.

Right from the top as I mentioned, the PMI is up nearly 2 percentage points from January, growing faster than January and growing for 9 consecutive months so we got a good trend set up there. There are 5 supporting metrics that go into the PMI equally weighted at 20% and I will cover them as well, new orders, conduction, employment, supply deliveries and inventories. So taking those one at time, new orders was up 3.3% points to 54.5% a really healthy position and growing new orders for also 9 consecutive months. Next is an interesting one, production. Production was down 6.6% points from January reaching 48.2 which is contracting from a growing trend previously. So what’s contracting down 6.6% points and just kind of reading the list here and behind the numbers, it seems clear to me that weather it has had an impact on production in particular, that it represents the cold weather, certain plant closing, the inability to get some or all of the workers to the workplace to produce the plant production level.

So I can see that and the production number itself and that in particularly in view of the strong new orders and also jumping down the page, that growing backlog of orders. So it seemed clear that they weren’t able to produce as much as planned and undoubtedly have some weather impact although we cant say that how much.

Tim: Brad, I want to interrupt you for just a moment, the logistics issue also regarding weather was I would think it would have a great impact on production as well. Frib wasn’t able to move, trucks were stuck along highways all over the south, so I think that as well as a factor.

Brad: That’s a great point and we also picked that up in the comments from  our panel that I’ve noted 3 out of 10 comments representative of hundreds of others that clearly talk about whether it has a negative impact and bad weather hampering the logistics  across the country as a direct —09:35:3— and cold products  industry and then another comment form chemical products that many raw materials disruptions due to weather and backlogs at the ports and definitely logistics has hampered the ability to get the right raw materials into production and as I said that shows up directly in production but it all shows up in a few other areas here as we go along and I’ll talk about those.

Tim: Brad, the production number dropping like this, do I recall in our previous discussion a month ago that new orders dropped off whether precipitously seems to bounce back, does that also have an impact, is it that rapid that we see changes.

Brad: In production?

Tim: Yes.

Brad: No, no its not, 6.6% drop, I have to look at my charts but that’s very unusual and now it seems consistent if you will with sort of normal weather patterns and normal overall patterns in the data that we see. So I can certainly in my mind attribute a lot of that drop to the bad weather and in as I said it shows up from other areas, for example supplier deliveries, something jump over employment for a second to a supplier deliveries and other one on the supporting metrics, that went up 4.2% in the direction of slowing faster than last month and the actual percentage is 58.5% to a rather high point indicating that suppliers were delivering slower to their manufacturing customers, hampered by logistics, hampered by the weather, unable to get at least all of the right materials to production. So it shows up there clearly as well and to the extent that you wouldn’t get the right raw materials to produce as well as the right number of people, then production is going to suffer.

Time: Okay, so it wasn’t necessarily new orders falling off that has that rapid change of production, its always other factor.3

Brad: It’s always other factors. I think new orders is healthy, we saw last month a tremendous drop and that was an anomaly certainly has occurred in a long long time but this is bouncing back and lets remember folks, anything over 50 is growing relative to the previous month so despite the fact it sells 13+ points last time, it was still about 50 or 51.2. January was better than December just didn’t grow as fast as December over November and here again this month were up better than January trying to keep everything in perspective here 54 and a half in new orders is a good healthy number. The production number this time is I think not related to any drop —13:06:6— and certainly we can see the weather impact.

Tim: Well, I think you made an interesting point there Brad because it is a build up of data for each month and sometimes when I began to look at it, I looked at it like a line chart that is going up and down and up and down rather than realizing that this is a statistical build up from the beginning of the month to the end of the month, mid-month to mid-month so that’s important.

Brad: So continuing with the 5 metrics that go into the PMI, employment is something that certainly everybody looks at from a number of business perspectives, this month worth 52.3 exactly where we were last month in terms of the growth rate, the same growth rate this month as in January so its kind of steady as it goes represents some high ranks building positions as fast as we can and yet it wont translate into large numbers which I think come out tomorrow from the Bureau of Labor Statistics but never the less, it is a growth in employment.

Tim: Any —14:26:7— what that number might be Brad?

Brad: I really don’t, I mean the numbers from the economists are kind of all over the board and changing by the hour. What I read is people’s expectations are now lower than previously expected with weather also playing a role in that. We do have a comment from the panel which I think is interesting, its somewhat focused in the fabricated metal products industry they’re having trouble in finding qualified C&C machinist even goes on to desperately trying to hire C&C programmers, so 3there’s a shortage of qualified people and we’ve heard that as well in the textile industry where there seems to be resurgence in that area but the skill set is no longer available and its going to take some training and some development.

Tim: This is consistent with what we’ve heard from Thomas Nepp when they were on our show is that there’s just seems to be a void of skill sets for manufacturers in America and they’re really struggling.

Lew: I just received an email Brad from Phoenix on this very specific topic about C&C machinist and how they are having difficulty and Raymond from Phoenix ended off by saying any suggestions; sorry I believed I’ve passed that to you.

Brad: This is a highly skilled technical position and capability that requires training and mentorship and things like that. I don’t think they come along overnight but companies are going to have to spend money to support these training efforts to get the skill set that they need and I certainly think that would be led by automobile industry as well as others that require that skill set.

Tim: Before we go into these reports a little deeper Brad and we certainly appreciate your insights, we’re always glad to have you on the show that is so helpful for manufacturing, we are going to take a quick commercial break.

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Tim: Alright, lets go back into it here, I had a question that got tweeted to us here, is any of these original, are you talking about a lack of programmers and a lack of C&C Operators, is that nationwide or is that one region like you mentioned Detroit Meato Industry.

Brad: I’m not able to look at that region specifically, I just picked this up in the comments from our panel this one comes from the fabricated metal products industry which is certainly aligned with auto manufacturing but certainly other manufacturing as well, aircraft, military equipment and so on.

Tim: So in a world that everybody is talking about that they can’t get good paying job, there is one out there.

Brad: Yes, I’ve known some skilled machinist and they make a good salary and certainly they’re a critical skill and to me they’re artists.

Tim: Well, Brad you said the volatility in this particular monthly report is fascinating, mind if you take if you take us through the next section, is that the end of the current section?

Brad: Inventories is also an interesting one and that 52.5 its growing, its up at 8 ½% points over January which was at 44, that was contracting of course and I see a weather impact here as well or production was lower than planned, I believed so inventories naturally sort of pile up but also if they look down at backlog was growing and so that is impacted by lower production as well. So it all sort of intertwined here and I see the weather impact on growing inventories with certain distinct possibility that there is a mixed issue where production was not able to get a right mix of inventories and to build the various things that they manufacture and so inventory and sort of other things build up for the lack of the just the right mix.

So its up at 52.5 its still certainly a healthy level and in general we like it about 50 of course which is exactly where it is. So I’ve covered the 5 different metrics that fill into the PMI; new orders, production and climate and supplier deliveries and inventories, they’re all about 50 except for production at 48.2 leading to that PMI of 53.2.

Tim: That’s great, Brad. So for our listeners, if you’re feeling like you’re the only manufacturer out there who got stuck in the woods during the snow storms and you didn’t get stuff in and you didn’t get stuff out, you weren’t alone, anything on that from you Lew?

Lew: Yes, actually I had a question specifically to Brad as self serving one being that we are a raw material supplier, forging supplier to the metal, metal working industries but we also received an email from Jone from Minneapolis, In your report, and I’m kind of paraphrasing her email in your report you’re referring to miscellaneous manufacturing as one of the 3 industries that went de-contracted last month. The term miscellaneous manufacturing encompasses many different things and I know from for example Don and Brad Street they have a section called miscellaneous manufacturing and that’s particular SIC code that spells out the miscellaneous manufacturing. I guess my question then, maybe more difficult for you to answer then I’ve hoped but is your definition of miscellaneous manufacturing being done in Brad Street miscellaneous manufacturing virtually the same, being that we have seen slowness in the industry because we deal a lot with the “miscellaneous manufacturing”? Just want to get a sense from you if we are talking about the same industries or are there overlaps or can you lend some thoughts on that?

Brad: Yes, we use NAICX codes for all of our 18 different industries and miscellaneous manufacturing is NAICX code 339. So I don’t have the other resources infront of me but that can be compared but I suspect that we use the same standard codes.

Lew: I believe that they done in Brad Street numbers 3599 as miscellaneous industry and I know I’m familiar with the NAICX numbers and I think that there is a certain amount of overlapping there, thanks for the input.

Brad: Yea I would thanks though and I think you can also infer if you’re in a particular category that you think might be covered by miscellaneous manufacturing and you want to know how to align to us with our industries. You can see specifically  the nomenclature of our 18 different industries and then if you’re not specifically in one of the other 17 then you are in miscellaneous manufacturing, I thought would be those without saying, but I said it anyway.

Lew: I appreciate that and I hope that that answered Jone’s question, Tim?

Tim: Brad, I guess our next step is into customer inventories?

Brad: Yes, customer inventories represents a finish at the end of the production line and even into the customers incoming inventory so that’s differentiated from what we call just inventories that being raw materials and inputs to manufacturing and this month its at 46.5 up 2 ½ % points from January, considered too low by our manufacturing panel but slower sort of creeping up towards that’s 50 mark which anything over 50 would be considered too high but it has been too low in other words under 50 for 27 consecutive months which indicates that customers  are purposefully running lean on finish goods inventories as a practice in these last certainly couple of years.

Tim: Yea I think that’s what we even see as occasionally as consumers on the store shelf, things seems to be occasionally spotty.

Brad: And again I think this is a strategy by companies to do that. Let’s go on to prices and distinct prices of raw materials and imports at 60 this month relative to 60.5 last month so its down a half a point, never left anything about 50 shows increasing prices of raw materials is a little bit slower than last and has been growing for an increasing I should say for 7 consecutive months. Very very normal for this time of year and the first one, two, three even four months of the year and my experience as a chief procurement officer is when suppliers and manufacturers get together to nail down pricing contracts for the year ahead again that happens generally in the first quarter so this is very normal and I would say the level is very nominal and would represent really no concerns one way or the other which I believe is good news and if you look deeply there’s really a lot of good news in this report.

Tim: Okay, that’s great.

Brad: Next step is the backlog of orders that represents “old orders” that haven’t been gotten into, its part of the planning process to plan and schedule orders to be able to manufacture and deliver products in a timely fashion and sometimes orders aren’t needed right away so backlog of orders is definitely normal and nominal. In this case its 52 that’s up 4% points from last month so its now growing, the backlog is growing from contracting last month and growing backlog of orders if you couple that with good solid new orders up 3.3 then there is a lot of pool for future production numbers and because you got old orders and new orders to deal with and certainly from comments the promise of more to come. So I expect in looking at these couple of things that the production numbers will bounce back nicely if the weather goes out and cooperates.

Tim: Yea, it certainly looks very positive when you talk about new orders in the backlog that those look very very strong and you’re right if the weather cooperates will be in good shape so right and go ahead.

Brad: Right and finally on our manufacturing at glands table, we report on exports which is exports of finish good and for the most parts could be some self esteem bliss and imports generally of raw materials or inputs the manufacturing. Both are exactly the same at 53.5 but helping numbers representing growth in exports for 15 consecutive months and growths in imports for 13 consecutive months, to me showing, now the strength that we refer to this in the opening comments, the strength of US manufacturing is appreciated by the international market place in terms of our ability to export our products. We like to import raw materials from other places so I think there’s real, continuing evidence that manufacturing in the US has enough leadership position relative to rest of the world, the comments on China earlier and again I see a quiet a bit of evidence so far how strong US manufacturing.

Tim: I think Lew also sees that in his business, its both strength of US manufacturing and interestingly enough the quality of what we produced that makes the United States is such an appealing market for overseas buyers, Lew would you say that that is consistent with what you’re seeing on your business?

Lew: Yea, we have actually expanded our markets into South America and the South Americans if they can’t buy from South America, they want American. They have strong ties to Asia and China but again they are willing to pay more for more consistent deliveries and more consistent quality of products and we’ve seen that now for the last several years Tim?

Tim: And I know its there in the report, it maybe we’re heading here, I see buying policy, have we talked about buying policy in the past?

Brad: We may have touched on it but its not something that generally gets  a lot of attention and I don’t know why because its really interesting to me we break that down into 3 different areas, the first one is capital  expenditures and the next is production materials and then MRO supplies and having said that it doesn’t get much attention, I know that a number of people that really dig into this and from an analysis stand point I know that that does for example and again there’s a lot of good information. Start with capital expenditures this obviously relates to one of our categories, machinery but certainly building new plant capacity and bricks and mortars and everything to do with increasing our footprint in our production capability. The average number of days to actually get your capital expenditures has gone up and to receive your orders has gone up by 8 days of this month to a hundred and thirty seven days which is really an unusually high number and so the companies that make the items for capital expenditures are really under a lot of pressure and strapped  for capacity and production which is really a good news and the fact that it gone up so much is I think quiet interesting.

Tim: Okay.

Brad: If the bottom line sets another way it shows that demands for capital expenditures is going up.

Tim: Okay

Brad: And corresponding suppliers are being challenged with that so again it’s all pointing in the right direction?

Tim: Brad, how many skills do you feel of the increase in capital expenditures has to do with the advent of newer or more improved technology in manufacturing equipment?

Brad: Actually, quiet a bit, I cant really quantify that but as I reflect back on our semi-annual report in December which we talk about on this show there is certainly an appetite for that and the strategy to continue to improve technologies and to optimize the use of technologies in many if not most of our industries.

Tim: And then I want to get back to that annual report which I think you are going to update in April but when we comeback from commercial break, we will find out when that update is going to be and I just want to touch and also the production materials and MRO supplies under buying policy, so after the commercial and we will be back in just a moment.

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Tim: Brad, as we kind of wrap up today’s show, I’d like you to talk about production materials and MRO supplies under buying policy and also give our listeners an idea of when that update is going to come out to your 2014 Annual Report.

Brad: Very good, production materials under buying policies, the average days to receive is 58 days and down for a couple of days from last month and pretty nominal and sort of plan as usual for the most part in our list of materials in short supply, we don’t have any of this month so that’s consistent with that and then MRO supplies average is 27 days relative to last month 26 days, fairly nominal there as well and should have no trouble getting your MRO supplies in the normal fashion and in normal lead times. As far as the next update on our economic forecast that will be I think that would be specifically on May 6, so that’s Tuesday which is when ISM has its international conference, several thousand people this year in Vegas and my colleague Tony Nieves and I will both report on the update to what we put out in December on that Tuesday morning.

Tim: Okay and Lew as we kind of roll our wrap up here, any other questions for Brad?

Lew: I have two comments, actually in the beginning of the show I have mentioned that there are many organizations such as ISM and NAM and so on that comes out with statistics and facts and information and apparently one of our listeners picked up on that and Phil from Chicago has asked what’s the basic differences between ISM, Institute of Supply Management and MAPAI which is the Manufacturing Alliance for Productivity and Innovation, they sure know how to come up with long names, you fellows, kindly give us some insight into that, Brad.

Brad: Well, I can speak to ours in terms of its longevity and its breath and depth its been ongoing literally since 1931 and has taken this specific shape in the 90’s when we developed the PMI specifically, I maybe slightly wrong about that date but in any case a lot of longevity and we cover the entire United States, extremely thoroughly with our panel of 350 or so panellist in these 18 different industries. So it’s the one in my awareness that is widely looked at by the feds, by the economist, by industry and others as something that has a lot of legs and lot of consistency which is the word we use on this program and other contacts but certainly it applies to the ISM-PMI.

The other index is, I’m honestly not all that familiar with, I’m sure they have tremendous value and hopefully look at things from a little different light and we always recommend to people, look at various economic indicators including our PMI, including Bureau of Labor Statistics and other things just sort of put it all together for yourself because I don’t think anybody has all the right answers and certainly we don’t and its not our intention to be able to answer every question. Our intent is to show month over month changes in these different metrics to look at trends accordingly and to be able to present other related information of interest and use in a very timely fashion. We are clearly regarded by the most as the first economic indicator that comes out each month that provides a leading indicator of things to come.

Lew: Well, thanks Brad, I don’t know if that fully answered Phil’s question, I guess Macy’s doesn’t tell Gimble’s and Gimble’s doesn’t tell Macy’s but thanks for the response just the same. Before the show closes, I’d like just to make a comment about if you wish to listen to the show that it will be uploaded onto our website mfgtalkradio.com, let’s see if I can freak out our production department, how about 5pm EST today Paul? And for the past shows and for the future shows, again go to mfgtalkradio.com and I think you’ll find some of these conversations that we’ve had in the past is extremely interesting, also if you feel as though you have a recommendation for a possible future guest or if yourself are a potential guest or have comments or suggestions to us, send an email to live@mfgtalkradio.com, Tim?

Tim: Thanks Lew, I want to again thanks Brad for being our guest on the show, these reports are always extremely informative for our listeners in the manufacturing industry and Brad got so much knowledge about them along with his purchasing manager’s knowledge, its been very very helpful, Brad, again thank you for being our guest.

Brad: Always my pleasure and thank you.

Tim: And Lew thank you as the sponsor of the show for All Metals and Forge Group if any of you are interested in All Metals and Forge Group, you can find their website at steelforge.com or any of the previous show, just to mention mfgtalkradio.com and that pretty much wrapped us up for today’s show, thank you all for listening.