Strong orders in May boost manufacturing
The Institute for Supply Management (ISM) released its Manufacturing Report on Business for May 2015, showing stronger than expected U.S. factory growth on the back of increased orders among other factors. The ISM factory index rose to a three-month high of 52.8 from 52.5 in April. The median projection of economists in a Bloomberg survey called for a reading of 52.
A reading over 50 indicates growth, while a reading below 50 shows a contraction in manufacturing. According to ISM, economic activity in the manufacturing sector expanded in May for the 29th consecutive month, and the overall economy grew for the 72nd consecutive month.
“It’s nothing to write home about yet, but we’re moving in the right direction,” said Brad Holcomb, chairman of the ISM Manufacturing Business Survey Committee.
When asked by Oil & Gas 360®, Holcomb said that he expects manufacturing to continue growing. “This month seems like a good signal,” he said. “We plateaued in the last two months, but things are starting to trend up again.”
The pickup in bookings and the strongest reading for order backlogs since November point to production gains that will probably help the economy bounce back after shrinking last quarter, reports Bloomberg. While two months of improved business investment and the end of a labor dispute at west coast ports are allowing manufacturing to stabilize, progress may be halting as a strong dollar hampers export sales.
When asked about the effects of the strong dollar on manufacturing, Holcomb told OAG360®, “the stronger dollar is hurting exports right now, but international buyers will get over it eventually. They like our products and they like buying from us.” Holcomb said, on balance, that he believes the strong dollar is either neutral or positive to manufacturing.
The role of oil prices
While the oil and gas industry has been hurting from the sharp downturn in prices since last year, manufacturing has benefitted substantially from in oil prices, says Holcomb. Manufacturing benefits from low oil prices in two ways, he says: first, it lowers the cost of raw materials used, and second, it reduces the operating costs of the plant.
“Seventeen of the eighteen sectors that we track have benefitted from low oil prices,” he said. “Of course, that eighteenth one is the oil and gas industry.”
Holcomb says that manufacturing benefits from low oil prices in two ways: first, it lowers the cost of raw materials used, and second, it reduces the operating costs of the plant.