Manufacturing Talk Radio Episode 3
Lew: It’s time for the only show that takes a look at the obstacles and opportunities open to small and midsize enterprises to manufacture here in America. It’s time for Manufacturing Talk Radio with your host Tim Grady. Hey Tim!
Tim: Well hello! We like our listeners back to the show. Today we have a returning guest Mr. Brad Holcomb who is the chair of the Institute of Supply Management Manufacturing Business Survey Committee. Welcome back to the show Brad!
Brad: Tim thanks for having me again. It’s a pleasure.
Tim: Well, we are very excited and before we jump in to the ISM report on business for November which was released yesterday, I’d like to give our listeners a postscript from our last show. Our guests were Paul Gerbino, he is the publisher of ThomasNet News and Beth Goodbaum, and she is the editor of ThomasNet News Career Journal. Paul and Beth spoke about the ThomasNet industry market parameter report that highlights very important issues and trends for the North American manufacturing sector. And more than 1200 respondents are small to midsize businesses were part of that survey.
And here to take aways from two weeks ago, these companies are really the hot beds of technology and innovation. There are several hundred thousand unfilled jobs in those manufacturing sectors today as we speak. More coming is the baby boomers retire but only 25% of the current manufacturing workforce are 18 to 34-year olds and by 2025, it’s expected to be 75%. So here is the challenge, manufacturing right now I guess has not seen his cool like the tech industries. Industry needs a brand makeover because manufacturing is where technology is applied.
To give you an example, just from yesterday saw a just page of Amazon.com introducing drones to deliver packages. The design, parts, fabrication, assembly and testing of those drones happened in manufacturing. So if you’re looking for a cool place to work and apply what you learned in school or college and develop tangible products for tomorrow, manufacturing a place is a place you should be looking. And now let’s jump into the ISM report with Brad Holcomb. Brad, give us an overview of the report and then we’ll get in to the details, how is manufacturing doing?
Brad: Well, manufacturing is kind of on a roll this month. We were at 57.3 in terms of the TMI which is the highest level of the year. And each month since May has outdone the previous month. So we’re on a building process here reaching a new height for the year in fact that’s the highest level since April of 2011. All of the underlying metrics are solid pointing up into the right and we’ll get in to the details of all of that but very pleased that we’re continuing the momentum of the second half of this year.
Tim: That’s great. And one of the things I want to touch on as we get into the detail is the ISM puts out on their website www.ism.ws, a semi-annual forecast and the last one was in April and the one is coming up in December. But for this report, what are the industries that seemed to be leading the charge, Brad?
Brad: The industries that are at the top of the list and you referred into the website, again that’s a little tricky, www.ism.ws or simply Google ISM report on business and I would invite our listeners to put up the website now so that perhaps you can follow along in more detail. We’re going to give in to a fair amount of detail in terms of discussing the 18 different manufacturing industries that we cover that covers again at the US manufacturing in terms of their contribution to manufacturing GDP. And also we’ll talk about how those particular industries faired this month in a couple of different categories.
So to start that discussion, we develop a TMI number for each of our industries. And that list is on the bottom of page one if you will. And we list our industries in the order of most growth reported to least growth reported. And then we also talk about any industries that are declining or are standing pact or in neutral relative to the previous month. So for the month of November, on the top of the list is plastic and rubber product, next if textile mills, third is furniture and related product, fourth is primary metals, next is food, beverage and tobacco products, paper products, printing and related activities and I’ll read the entire list and then come back and discuss; petroleum and coal products, miscellaneous manufacturing, electrical equipment appliances and components, transportation equipments, chemical products, computer and electronic products, non-metallic mineral products and fabricated metal products.
Those 15 industries of our 18 and clearly many of our largest industries are reported growth in the month of November. There are three that are reporting some contraction in November and the list starts with in this case the most contraction reported; apparel and leather and allied products, next is wood products, a little bit surprising there and then finally machinery. And none are reporting, you know, equal to last year. So we got all 18 accounted for on this list and you get some chance of the order.
Tim: I didn’t realize that the order that you have the listed is from for instance most growth to least growth of those who were experiencing growth. I know that having primary metals in the area, in kind of been fourth place if you will would excite Mr. Lew Weiss from all metals in fourth group who is typically my co-host but he globe trotting today, so leave that with us. You know, why don’t you take our listeners to some of the details of the reports in the industries so that, would you like so start with new orders or would you like to start with an industry discussion, Brad?
Brad: Well let’s start with a broad cable that we call manufacturing at a glance. And that’s on page two if you will of our report. And it puts really everything in perspective. If you just had a few minutes, I’d spend time on this particular cable each month. It discusses number one, the TMI at 57.3 and the fact that it’s up .9 percentages from October. The next five metrics in the table namely new orders, production, employment, supplier deliveries and inventories, one, two, three, four, five, those are the specific self-supporting indexes that feed in to the TMI to create the TMI weighted equally.
So those are all weighted at 20%. And as I made a comment earlier, everything is pointing up into the right new orders at 63.6 up to three percentage points from last month cold be about 60, it’s a really solid number, production as well up two percentage points to 62.8. Another one that’s a lot of people are interested in is employee up to 3.3 percentage points to 56.5. That’s the biggest number since I think April of 2012 and it should bold well for employment numbers coming out later in the week. And supplier deliveries at 53.2 mean that supplier deliveries are slowing.
And the interpretation of supplier deliveries slowing is that suppliers are having a hard time keeping up with the demands from manufacturing and that’s a good thing. So slowing supplier delivery is a good thing, anything about 50. And then finally inventories, meaning raw materials inventories is at 50.5, you know, right at that dividing line between growing and contracting. Inventory is being well managed. So, you know, all of those metrics again are above 50. They’ve feed in to the TMI equally weighted to achieve this 57.3.
On the table as well are one, two, three, four, five additional metrics that we look at and track and trend. But we do that independently. That is the TMI doesn’t revolve around this specifically. One is a customer inventory that’s been and should be the inventories in at 45. It’s too low which is a good thing again because the customer inventories are too lo. There would be a tendency to restock and to refill those shelves. Prices at 52.5 down three percentage points, you know, broadly speaking prices are well in control.
No concerns about inflationary prices, suppliers are comfortable with their pricing of raw material and we won’t see price increases until the early part of the next year which is pretty difficult. Another interesting one, of course they’re all interesting but backlog of orders at 54 up two and a half means that there is previous order, more previous orders that they haven’t gotten to yet. So that’s a good thing as well above 50. The last two exports and imports, exports is 59.5, the highest we’ve seen in a couple of years 12 months in a row of growing exports.
What that means to me and to our panel is that the non-domestic world if you will, the international community loves our products, loves US made products, the quality, certainly the pricing, the availability, the selection and it’s shows up in our export numbers. Finally on the list imports, meaning imports largely of raw materials and subassemblies at 55. That’s a solid number. That’s been growing for 10 consecutive months. So, again, all of these numbers are sort of up into the right and very good shape as we look at November and get close to the end of the year.
Tim: Brad, in your experience these very upward number trends, is there a time in recent history where we’ve had this kind of strength in manufacturing?
Brad: That’s a great question. If I go back to 2011, there was this kind of strength in the first four or five months of the year. And then the second half sort of petered out if you will. This deals a lot different. Of course 2 ½ years removed from that and let me also point out that I’ve eluded to the second half of 2013 being very solid that the first half in comparison. The average TMI in the first half of this year was 51.5, okay. You know, moving along but nothing to ride home about if you will.
Brad: The average for the second half so far, July through November is 56.2. That’s a difference of 4.7 percentage points, a very meaningful difference suggestion to me that we’re in a different environment in the second half and, you know, that’s a good thing. And I just don’t see anything in terms of headwinds right now that would change this for very — you know, certainly the balance of the year, one month to go and heading in to next year.
Tim: Okay, great. Now, let’s talk about if you will, you know, if I’m not jumping too far ahead, new orders, that one took a real jump…
Tim: This past month.
Brad: Yeah, new orders, definitely. And I think that while all of these sub-indexes are all important and as I said the five feed into the TMI are equally weighted. New order clearly drives the whole system. I mean a continuation of new business is what it’s all about. And at 63.6, that’s a very solid number. I think it’s been above 60 for four or five consecutive months and trending well. So, that list if we looked on the bottom of page three, if you’re looking on a paper copy, under new orders, we show that 12 of our e18 industries are recording growth and in this order and, you know, a year definitely.
You know, Lew is just going to love this one, primary metals, top of the list, textile mill, next furniture and related products, third plastic and rubber products, food, beverage and tobacco products, transportation equipment, fabricated metal products, paper products, miscellaneous manufacturing, chemical products, machinery and finally electrical equipment, appliances and components. Only two industries reported decrease in new orders and those were wood products and non-metallic mineral products.
So 12 of our industries, so it’s pretty broad based and if you kind of do some groupings if you will, there are a few industries related to the auto industry and we know that’s going well. I saw a headline today of, you know, the auto industry best month in X amount of time. You know, once again industries related to housing, you know, whether it’s furniture and related products or electrical equipments, you know, those related to housing. And then we see food beverage and tobacco people are enjoying their meals these days and that’s one of our largest industry.
So, a broad grouping of products here that speaks well for the economy and certainly for manufacturing.
Tim: That’s terrific. We’re going to take a quick commercial break here and then we’re going to come back and talk with Brad about production.[Commercial Break] 0:18:01 – 0:20:12
Lew: And now back to Tim and Brad and the new positive report. That’s a peasant surprise here.
Tim: Well this has been terrific news Brad. This is probably, I don’t know if the mainstream media is touting this but this is probably the best news we’ve heard in some time. How is production doing?
Brad: Well, production is doing great and the mainstream media has really picked up on this as well. And you know, I think that it always is seen on a release state yesterday in terms of stock market activity. I think we kind of help to keep this marketing in check yesterday despite some, you know, not so positive news in other sectors, okay. So, it was again very well received and it bid estimates that Wall Street has for I think 55 and change. So we always like becoming and bid the estimates. When I talk about — yeah, let’s talk about production next.
Production is a planned activity, manufactures as our listeners will know try to maintain a steady production load if you will relative to the capacity, relative to their employment. And to do that, they utilize a combination of new orders and the back log orders which we’ve discussed. And those are the full strong levels. Production was at 62.8. It’s been above 60 at that in front of me the last four months perhaps a little bit longer. And we’ve got 13 industries reporting growth and production and I’ll read that list in just a second.
But I thought I’d take a little bit of a side trip here to zero in on the 18 industries that we do covered and try to give out listening audience some perspective on which ones are the largest and then go on down, down the list if you will. And I appreciate that I’ll be, you know, talking about a lot of details here but hopefully our listeners can get a sense of things and perspective. And our whole set of metrics is gauged to in our panel of 350 people that report data from their factories. Our position relative to the size of their particular industry as it relates to all of manufacturing.
So, the number industry that we have at nearly 16% of manufacturing GDP is computer and electronic products. And as I think about that, it certainly continues to make sense as we are a very technological society. A lot of computers and electronic products, you know, everywhere and so no surprise there. So that’s our largest industry. Second is chemical products at 13% plus. Number three is food, beverages and tobacco products. That’s just over 12% of manufacturing GDP? A fourth on the list is petroleum and coal products.
And then round out the top five is machinery which in our case has a lot to do with capital expenditures improving our plans which happens on a regular basis. And so those are the top five. And number six is transportation equipment, manufacturing a seven and a half percent. That includes, you know, cars, trucks, airplanes and such. Seven is fabricated metal products which feed into the auto industry and others as well. Number eight on the list, miscellaneous manufacturing at 5.25% of manufacturing GDP. Number nine is plastic and rubber products at just about four percent.
Paper products is 10th on the list at three and a third percent. Eleventh on the list is electrical equipment, appliances and components at two and a half or so percent. Twelve is primary metals at two and a half percent. I’m getting close to the end here, 13 is non-metallic mineral products at 2%. Fourteenth, printing and related support activities, almost 2%. Fifteen is furniture and related products at one and three quarter percent. Sixteen is wood product at one and a third percent and then the last two 17th textile mills and textile products at about one percent and then finally apparel and leather and allied products, that’s about .7%.
So if you’re listening, hopefully you caught your particular industry and how it relates to this list of 18 and again with division, our panel according to the contribution of their particular industry and the grand scheme of things relative to manufacturing. That’s how we get a very balanced report unlike any other report out there that’s certain we’re aware of.
Tim: Brad, I think that is really grand information. I think it’s important that as we have been discussing the last two shows with you that the listening audience and the people who read this report understand the data behind that monthly number. And there are so much here that this is really helpful. Thank you for providing that breakdown of being in industry.
Brad: Thanks Tim. Well you’re absolutely right and that can’t be, you know, over emphasized. There is a tremendous amount of information here. If you spoke to all levels of folks in manufacturing, you know, from presidents and general managers, you know, through the ranks to you know, buyers and planners, lots of solid information to provide, you know, perspective on your company and how it’s steering in your industry and in, you know, the broader context of manufacturing. So in production, let’s go to that then.
As I said, production is almost a consequence of new orders and backlog of orders. We have 13 industries reporting growth in production during November in the following order; primary metals, textile mills, furniture and related products, food, beverage and tobacco products, paper products, plastic and rubber products, electrical equipment, appliances and components, fabricated metal products, miscellaneous manufacturing, transportation equipment, computer and electronic products, chemical products and finally machinery.
Then there are three industries reporting a decrease in the order of most decrease reported is, apparel leather and allied products, next is wood products and then non-metallic mineral products.
Tim: Now Brad, you mentioned wood products before and it was kind of a surprise. What about that decrease that you’re seeing wood product is a surprise, we see I thin home starts up and I think home people unloads and reporting higher numbers for lumber sales. What’s the surprise?
Brad: The surprise is that, you know, it’s on the declining list and couple of different areas when all of what you said is true. Housing which is what this largely relates to is this top. I think this is likely to be seen as momentary and an inventory adjustment. We have heard from time to time that, you know, homebuilders are having hard time keeping up with demand due to the amount of steel labor that’s available. And then, you know, and related so they are backing off of buying more inventories at the moment because of, you know, those situations would be my guess.
Wood products as well as furniture and related products has been on the top and to put these lists throughout the years which is why I say it was a surprise to me. But then as I mentioned I think it’s certainly could be momentary due to an over shooting of inventory.
Tim: You know I’m really excited about the next topic because we are coming out of the great recession where unemployment was the highest, it’s been probably since 1930’s.
Tim: Could you please, you read on the employment number that you’ve got here Brad?
Brad: Yeah. You know everyone, you know, really looks at this since, you know, over the past few years since we’re starting to climb up of the recession. It’s a difficult subject for a lot of folks and I think we’ve all had friends that have been out of the job and we help them seek new jobs and so on. So, a lot of people obviously focus on unemployment. And for us to see now a 56.5 up 3.3 percentage points in November is a very good month. I think that’s the highest number in a couple of years. And it should bold well for the government numbers that come out towards the end of the week.
And by the way, this is one of the areas why, you know, the senate and White House really, you know, another economist really loved this report because it’s a lead, the indicator to many other indexes and dated at somehow, you know, subsequently either a few days of a few weeks. And it gives them an early indication of things. So generally speaking, you know, a good number in our employment number leads to a good number in the Bureau of Labor Statistics that will come shortly.
Brad: What this means is that if you put this all in perspective and, you know, follow this month after month, you get a feel for, you know, what these things mean beyond the numbers if you will. And what this means to me is that manufacturing now realizes that it had several months of strength and it’s been building momentum since the beginning of the second half month over month increasing TMI’s. So they are much more comfortable and proactive about more hiring because they see and feel more of the same coming down the pike is you will.
So they’re not necessarily being aggressive here but they’re certainly being proactive to make sure they have enough people onboard to meet the demands that they seen out and that they see coming up in the near future. And so they’re definitely hiring, filling open positions and making sure they got enough employees whether it’s labor or others onboard to meet demands.
Tim: You see that textile mill leads the charge in employment, that’s interesting.
Brad: Well it is. I’ve been reading headlines about textile mills in the past few months and there seems to be a resurgence of interest in for example apparel made in America. I just bought a paid of jeans that were made in America. And they’re pretty darn good quality and they got a little flag on the pocket, made in America.
Tim: It’s great.
Brad: So I think this is one of the areas that, you know, people are thinking about when they talk about, you know, reassuring and bringing manufacturing back to US which is a whole other discussion. But I certainly see that being discussed broadened it the textile mill seems to be sort of leading the list of things that are really happening. And also, specifically heard with respect to textile mill that they’ve been having difficulty finding the type of skills that are required that used to be plentiful I’m sure in the US but we have to rebuild that labor base.
And, you now, there might be some retraining and re-schooling involved. And I’m just really personally interested in the fact that textile mill is leading that particular list.
Tim: Yeah that’s fascinating to watch that happen.
Brad: You know, and again that’s a particular story that comes to mind when I look at this report and I — you know, I’ve been immersed in the report but there are many, many other stories and stories for our listeners in that particular industry, you can grab your industry from any and all of these lists month over month tracking trend your particular industry and find, you know, some areas of interest, some areas to take advantage of and so I certainly encourage everyone to do that.
Tim: And before we get in to the supplier deliveries, we’re a little — it could be a little ahead of ourselves here but I think I’d like to take a commercial break here so that we can — and not interrupt our discussion on supplier deliveries. So why don’t we break real quick for a commercial and then we’ll come back.[Commercial Break] 0:36:31 – 0:39:14
Lew: And now back to final wrap up, a final look at the positive, impressive manufacturing report that we’re discussing this morning. Now, you guys have come up with lots of interesting stuff here. I’m surprised that this isn’t front page news on the Wall Street Journal here today. I’m glad that we’re covering it in such detail but I’m surprised that those aren’t.
Tim: I’d like to see it. And Brad, you made a very interesting comment about supplier deliveries that slower supplier deliveries is a good thing. Can you go into that a bit?
Brad: Yes. Before I do that, speaking of commercial plugs, I want to plug our December 10th coming up semi-annual report. We do that each December and then we do a tune up in April-May timeframe. That’s loaded with sort of wrapping up the current year but also it’s the first forecast for 2014 for the year ahead. Now I invite our listeners too and then look at the website on December 10th. Last December, our panel, this same panel predicted that the second half of this year would be substantially better than the first half.
And we see that, you know, coming into permission big time. So our reports in our forecast are pretty good. The next one is coming up on December 10th. In terms of the supplier deliveries, when the number is above 50 and it’s at 53.2, it means supplier deliveries are slowing. And their slowing concerns of raw materials to the manufacturing plants because of the activity, right. There is so much activity within manufacturing in terms of new orders, in terms of high level or production etc. that suppliers are having a harder time keeping up so their deliveries are slowing and we feel that that’s a good thing within bounce.
It just simply says that, you know, the whole supply chain is tight and it’s kind of wound up because there is so much activity.
Tim: Well that’s great, that’s great to know. It’s something that I didn’t understand about supplier deliveries. And a matter of fact a lot of what’s coming out in the discussion today I think is incredibly helpful to our listeners.
Brad: Yeah. So that’s the fourth metric that feeds directly into the TMI. The fifth one is inventories. Meaning, inventories of raw materials which is also one that’s — it takes a little bit of thinking and context and perspective from month to month and sort of period to period. Generally speaking, you know, 50 means that inventories are just right. Below 50 means lean, above 50 means that they’re, you know, the opposite of lean. But in this particular environment of growth and continuing growth and a trend in that direction, a number above 50 is definitely, you know, desirable and good news because our factories will climb at that way.
They will plan to have plenty of inventories on hand to meet demand. Sometimes in another context, in a recession area environment, a number above 50 will represent unwanted inventory and that’s not a good thing. So you have to really understand the context of the number. But in today’s environment, a number above is definitely good news and feeds in a positive fashion into the TMI. Inventories, you know, for me have been well managed and well controlled this year and we know that in our semi-annual reports, there will discussion about the importance of inventory control from our manufacturers.
And certainly it’s an area where you can have an opportunity to control cost, to contain cost but also to fit production obviously.
Tim: You know, I’m looking at…
Brad: Kind about…so, go ahead.
Tim: I’m sorry Brad. I’m looking at your April manufacturing sector summary in which the operating right is currently been 80.2% of the normal capacity. When did they start hitting the capacity wall?
Brad: Yeah. About 85% in my experience and in talking with others from my manufacturing background, 85% is generally been considered, you know, pretty tight end of the point where the CFO’s maybe to start opening up the first streams to, you know, to add facility’s capital and perhaps more employment as well.
Tim: Okay. Now we’ve just got a couple of minutes left here. Is there anything you’d like to wrap up for our listeners, Brad?
Brad: We covered the first five metrics that feed directly into the TMI. And then there are other metrics here that are very interesting. Prices I think are particularly important to understand and when it comes to pricing and things in that general area, I think we mentioned last time we have a list of commodities each month that are up in price as recorded by the panel and down in price and also in short supply. And that’s really good to focus on. This time we see, you know, steel products up in price. And so if you find steel, you know, you want to track that just as an example to gauge when to buy, when not to buy.
So, again, we’re covering more information here. There is more information yet to be discussed and to be really appreciated on a month to month basis.
Tim: Well, certainly we would like to entertain having you back on the show. We’re all looking forward to the December 10th report that’s coming out. I didn’t realize that that was the forecast in the April was the tune up. That’s terrific information. And do you see if you take a look at that December forecast and I don’t want to steal any of your thunder, do we seem to be continuing to look strong going into 2014?
Brad: I can’t really comment on that. You know, these things are highly controlled on a month to month basis as well as the semi annual. And so, they just have to tune in. But, it will be a very interesting wrap up of 2013 as well as a detailed look ahead to 2014, our forecast, we compare how well we’re doing in our forecast for year to year and semi annual to semi annual. So you can get a feel for whether, you know, this is good information or not. I suggest that it’s excellent information and I often tell people that the semi annual reports have even more value than our month to month reports in many respects.
So, with that teaser, please look at that on December 10th and enjoy the reading.
Tim: Well, we certainly will, that I’m looking at the April report, that’s just terrific information. Is any of that information Brad given and I see it’s a PowerPoint presentation; it’s in a written form. Is any of it in an audio form?
Brad: I don’t believe it’s in an audio form. We do have the PowerPoint’s, we do have the reports themselves, all on the same website. You can find them easily in the same publication section so you can go back and take a look and look forward to seeing them posted, you know, in a timely fashion when we report for example on December 10th. Now, you’ve refer to the April which is a tune up, the December one is two to three times the size of the April report and has a ton of perspectives on the current year and a ton of interesting predictions for next year. In some cases, it’s first half versus second half as I mentioned one time before on this call.
Tim: Okay, well gosh Brad, thank you so much for coming back on our show. We’re going into this report in such detail. It’s I think it’s been the invaluable for our listeners to get a deeper and greater understanding of what you presented here today. We certainly look forward to having you on again in the future. We just want to thank you for being our guest again today.
Brad: Well it’s my pleasure and I’d like to wish everyone a happy holiday season.
Tim: Thanks Brad and to all our listeners, happy holidays and we’ll see you or sneak with you again on Manufacturing Talk Radio in about two weeks.
Lew: You have been listening to the only show that takes a look at the obstacles and opportunities, open to small and midsize enterprises to manufacture here in America with your hosts Tim Grady and Lew Weiss. Sponsored by Alforge Metal Group.