September 5, 2006 – The ISM diffusion index of U.S. manufacturing activity (released Friday) edged down by 0.2 index points to 54.5 in August (Chart 1). This index has been homing in on a relatively narrow 53 to 55 range since May. These levels are suggestive of good (but not spectacular) growth in the manufacturing sector.
According to the ISM press release, “The major concerns in manufacturing at this point are the continued upward pricing pressure that has existed for the past 13 months, and some industries are experiencing a degree of inventory buildup.”
The ISM production index fell by 1 index point to 56.6 in August – indicating slower August growth. Nevertheless, the production index continued to outpace the new order index, which fell by 1.9 index points to 54.2 in August (Chart 2). With “some industries” expressing concern about excess inventories, we might be due for some further slowing in production growth.
The ISM inventory index edged down 0.3 index points to 50.2 in August (Chart 3). However, this is an unusually high level for this particular index, which averaged 44.9 for the ten years through 2005. According to the ISM, a sustained inventory index level above 42.2 is consistent with rising real dollar manufacturing inventories, as measured by the GDP accounts.
The ISM index of manufacturers’ input prices fell by 5.5 index points to 73.0 in August, but continued to signal exceptionally strong growth in manufacturers’ input costs (Chart 4). This index averaged 56.2 for the ten years through 2005. August’s index level exceeded this historical norm by nearly 17 index points.
Bottom line: Continuing good growth in U.S. manufacturing activity and very strong growth in manufacturers’ input prices through August. Undesired inventory accumulation suggests some downside risk to future production growth.