MFGTALKRADIO Season 1 Episode 1
Welcome everybody it’s time for Manufacturing Talk Radio. The only show that takes a look at the obstacles and challenges of manufacturing here in America brought to you by your host and All Metals & Forge Group with the nuts and bolts of our show here today. Welcome Lewis Weiss and Tim Grady. Hey guys.
Tim Grady: Hey.
Lewis Weiss: How are you doing?
Tim Grady: Welcome to Manufacturing Talk Radio, the national conversation about manufacturing in America live on the internet, where we go behind the numbers to give you the in-depth story because it is manufacturing and the manufacturing industries that have led America out of every recession. You can find Manufacturing Talk Radio at mfgtalkradio.com and if you would like to ask one of us a question, please email it to firstname.lastname@example.org. We’re excited today to have two very special guests with us and live we will introduce individually as we dive deeper into the ISM number that was released on Friday at 10 a.m. First, let me introduce our guest and co-host, Mr. Lewis Weiss, president and founder of All Metals & Forge Group, an open die and a seamless rolled ring forging manufacturer. Lewis, tell us about All Metals & Forge Group which has been a manufacturer on information resource for over 40 years.
Lewis Weiss: Thanks Tim. You didn’t really leave me much left to say so thanks again.
Tim Grady: Sorry.
Lewis Weiss: It makes my job easier. Yes. All Metals & Forge Group has been in the metals industry for just about 40 years which in the last 20 years have been mainly focused on open die forgings and small and large seamless rolled rings. Since 1994, when we went live on the internet, we used the website not only for marketing about a provider of information, metallurgical data, news of the industries to a broad based manufacturing base. The idea of Manufacturing Talk Radio is just an updated version of dispersing manufacturing information to a limitless space of manufacturers nationally and internationally. The Institute of Supply Management was an obvious choice to participate with us on our very first show. We invited a very special guest today. So Tim, why don’t you tell us a little bit about our guest?
Tim Grady: Okay. And now I’d like to introduce Mr. Brad Holcomb, chair of the Institute of Supply Management Manufacturing Business Survey Committee. Thank you for being with us today, Brad.
Brad Holcomb: Oh, it’s my pleasure. I’m looking forward to the discussion.
Tim Grady: Oh, that’s great. Brad, could you explain to our listeners the role of the Institute of Supply Management, who are its members and what is its purpose.
Brad Holcomb: Certainly. The Institute of Supply Management formerly known as the National Association of Purchasing Managers or NAPM, really got its beginnings since about 1931 or perhaps even a little bit before that but we know the report on business in its earliest forms was produced and published at that time and has been published ever since except for a four-year period during the war. We have 40,000 members across the world, 150 affiliates in international areas and members from 90 countries. The mission of ISM is to enhance the value and performance of the procurement supply and management profession, its practitioners and organizations and we do that through education, research, standards of excellence and information dissemination like we’re doing today.
Tim Grady: Oh, that’s great. Thank you Brad. Now, we know that the institute publishes many reports including the monthly report on business that contains the much anticipated ISM number or PMI number that is released just after 10 a.m. on the first business day of every month. Brad, how was the PMI compiled and calculated each month to reflect the state of manufacturing in the US?
Brad Holcomb: Yes. And just to really reflect back on history, I mentioned the report on business going all the way back to 1931. The PMI index itself was developed in 1982 by ISM and the Department of Commerce jointly and it’s been published ever since. And the process is that we have about 350 procurement supply management professionals that report back to us on a monthly basis really exactly what’s happening this month in their factories relative the last month and so these we called them panelists and they’re all anonymous but they’re all handpicked generally speaking with long term service and highly network within their corporations. They do a great job in a disciplined way reporting as I said what’s happening in their factories each month. We compile that information and the staff location in Tempe, Arizona. I get the report compiled and I personally write the reports and then disseminate them to Wall Street on the first business date of the month that you mentioned.
Tim Grady: Really that’s great. Brad, we asked you the burning question people have about America where we seemed to be outsourcing everything. What is manufacturing contribution to the gross domestic product and how do you see that changing over time?
Brad Holcomb: At the present time manufacturing is best we can see is about 11 to 12% gross domestic product and it really has been growing in terms of its gross production if you will but the percentage of GDP has declined over the past few decades from probably 25% a few decades ago just as I’ve said 11 or 12%. Nevertheless, on an absolute scale it has been growing and of course the service satisfactorily has taken over and account for a much larger portion these days. Nevertheless, we see manufacturing coming back to the US and you can see certain stories like cellphone being produced in Texas these days which is where I’m talking from and I know that many companies are considering the same because the risk factors and cost factors. So, what I can say in some areas that from my point of view and through the data, manufacturing in the US as strong as ever, healthy and positioned for growth.
Tim Grady: Well, that’s encouraging. PMI number what we know is not only just a number but it’s surely the report on business that’s the backbone of what’s happening. Give us an idea of what that report contains, Brad.
Brad Holcomb: Oh, absolutely. And let me refer to the report that we just published and released on November 1. There’s a tremendous amount of detail as you have alluded to in the report itself. I’m holding it in my hands and people can see it on the ISM website which is www.ism.ws. It’s a little tricky on the dot ws but the report and historical reports and historical data are all there for people to read and appreciate. So the report itself is nine or 10 pages. In this case, this month it’s 10 pages long and it contains a lot of definitive data on the 18 manufacturing sectors that I mentioned in terms of which ones are growing and which ones are contracting.
But then it goes on to also talk about these industries in terms of how they’re doing with new orders, production, employment, supply or deliveries, and inventories which directly fit into the PMI and several other dimensions such prices of raw materials, imports and exports, customer inventories and so on that are additional information beyond the PMI and the supporting index that go into it. So there’s a lot of detail and data and I would invite our listeners to really dig in and to appreciate what’s there.
Tim Grady: And we are going to dig into that report a little bit today. Lewis, I know you follow this report closely for several decades but your business doesn’t always track with the PMI, how have you seen the last two or three months with the PMI is rising?
Lewis Weiss: Well back in 25 years ago when I started tracking the report, there was the PMI number that I looked at and realized after about two or three years that wait a minute, I have to get into the report and look at our particular sector that affects our particular business. Typically, we were always a leading indicator whatever was in the report, what was always happening with All Metals & Forge Group. The last several months however we noticed that there’s a bit of a departure based on the PMI number. When we looked into the specific industries, fabricated metals for example or primary metals we have seen that those industries are not expansive right now, that they are tracking behind the (inaudible 10.16). So we’ve been using that information in order to guide our business and in terms of our net sales in marketing, we keep a very careful watch on the report, we look forward to it.
Tim Grady: Yeah, it is terrific amount of information and we’re going to walk through that. Threw it in some detail but before we do that and before we come back start jumping on the report, we’re just going to take a brief commercial break and we’ll back with Manufacturing Talk Radio.
And now back to our nuts and bolts guys and their nuts and bolts discussion here.
Tim Grady: Get into the report a little bit, we’re talking about the 18 manufacturing industries, supporting and reporting growths in October, and for our showing some contraction, can you give us a little idea of what’s going on in the growth sectors and what maybe contributing to the contraction?
Brad Holcomb: Right. And just picking up on just previous discussion in terms of correlating one’s business with the PMI, you’re exactly right but you need to look into the details of the different industries. For example primary metals will not always track according to the total PMI. We do have as I mentioned 18 different industries and we positioned our panel in terms of the number of panelist for each sector according to the percentage that each sector contributes to overall GDP. So on the case of primary metals for example, we indicate that that sector represents only 2.54% of GDP so it’s certainly could – you view differently when you look at it in detail rather than total which again emphasizes point of getting into detail. Does this make sense?
Tim Grady: Sure. You even made a couple of notes here on the last 12 months in terms of the PMI and the flow of it. Did you have a question for Brad on that?
Lewis Weiss: The trend just seemingly has been going up in terms of the total PMI. Again, not to overly rehash the fact that our particularly industries have been going somewhat backwards, I think one of my questions that I might have for Brad is that from the forecast standpoint, what is your view Brad in terms of the Roosevelt Industries, the primary fabricated metals machinery builders, off road mining, oil and gas and such?
Brad Holcomb: That’s really a question for a true economist for someone that follows that particular sector. It does seem just sort of in summary that primary metal is lagging behind the rest of the industries. It’s not the only one going back a half a step. We have 14 industries that are reporting growth in October and as you said four that are reporting has declined and of those four primary metal is one but also apparel, leather, and allied product is another. Chemical product is another and that’s been gliding for quite some time under pressure as well miscellaneous manufacturing. So this adds and flows and changes from time to time, I would think that primary metal certainly is related to transportation but also to many other things including the companies and industries that represented by Caterpillar and John Deere. And so you can look at those companies to find some correlations and some answers. The best I can do from an engineering perspective and from the data here.
Lewis Weiss: Just to rehash for a moment, one of the points that we look at is the new orders and we know that when new orders in our particular sectors are on the rise, we usually about 30 days for actual purchases and new contracts and new hour of queues are coming online. Is that based from your side of the list?
Brad Holcomb: Yeah. That feels right and speaking of new orders that’s really what drives this whole PMI more so than really anything else conceptually. Although let me point out to the audience that the PMI is constructed specifically from five different sub indexes and here they are. New orders, production, employment, supply or deliveries and inventories of raw materials and each of those is measured on its own and then contribute 20% each to the PMI. So in that sense, new order is weighted equally with the other four. On the other hand, I think it only made sense that you’ve got to have a continuous state of new orders for this whole system to be vibrant, that’s been certainly true for the past several months with new orders being above 60% for the last three months continuously.
Tim Grady: Brad, you do it all factor in transportation revenues as an indicator for your purposes?
Brad Holcomb: No, not revenues. Again, the ones that I’ve mentioned factor particularly into the PMI and each of these indexes is what we call a diffusion index. We asked the panelists the specific question in each case of: Are things better, worse, or the same this month relative to last month? And then a diffusion index takes the full value of what they tell us is better and half the value of what they tell us is the same, the result in the index itself and that provides clear directional information on the indexes such as new orders, production, employment, etc. which what we’re looking for. We’re looking for the direction is it the same, better or worse. So we don’t look at revenues at all. We look at things from the standpoint that I just mentioned.
Tim Grady: And Brad I have been curious so I’ve read in number of these reports and what you hear on the nightly news is a sound bite, the number is 56.4 for the month of October and above 50% means manufacturing economy is expanding and below it’s generally contracting but the report also says PMI an excess of 42.2 over a period of time generally indicates an expansion of the overall economy.
Brad Holcomb: Right.
Tim Grady: So how does that relate? That one doesn’t register in my brain if you will.
Brad Holcomb: We work each December with the Department of Commerce to really look at the seasonal impacts of the data and take out seasonality, but we also look at a number of other indexes and correlate our PMI, with for example GDP and out of that correlation study comes the number 42.2. So it is statistically based and refreshed each December for the year ahead working with the Department of Commerce. So even if manufacturing is below 50 but above 42.2, the correlation generally speaking and we understand statistics indicates the expansion of the overall economy.
Tim Grady: Okay. Now the new order index for October was 60.6 and it seemed fairly strong for the last couple of months. Do you have any sense of where it’s going in the next 90 days with respect with the economy? And here is what I’m asking, everyone is waiting for the economy to pick up. We’re waiting for the pull.
Brad Holcomb: Right.
Tim Grady: And no one sensing it or feeling it. Do you have any sense or feel for it that with the institute?
Brad Holcomb: Well, this year has been very interesting but so has the last several years obviously since the recession and I spoke with the chief economist that set here in Dallas who has been at his job essentially for 40 years and he reminds me that we’re still in unprecedented territory following the recession that this recovery is unlike anything else that we’ve experienced and so people can guess and forecast and so on but history is not necessarily repeating itself so. With that in mind, nobody like how this recovery is taking place and I used the term it’s sort of general recovery and shift and starts, almost continuously looking for direction. Having said that, if we look at this year from January and again, I invite the readers to look at all these details and data on the ism.ws website, we started out with the PMI in January, 53.1 and it went to 54.2 in February and started to cool off 51, 50, 49 below 50 in May and then back up to 50.9 in June. So that covers the first half of 2013 and I’m going from memory I think the average was about 51.8 or something very close to that in the first half of the year. However, I see a distinct change in the third quarter started July, August, and September where the average was something like 55 and change. So almost full 4 points higher in the third quarter than the full first half and then that continued into the first month of the fourth quarter namely October at 56.4, so we’ve got four months in a row of pretty strong numbers relatively to the first half. Now that is I think interesting and suggestive of the fact that we built a momentum in manufacturing and manufacturing is ultimately whether it leads or lacks a reflection of the whole economy. So I think that things are certainly in a positive trend right now. I think what I could say is I don’t see anything in my data that would suggest we’re not going to stay on this track for a while.
Tim Grady: Brad that part of your explanation probably answers my point about why All Metals & Forge Group numbers are not consistent with the PMI as it usually has been for decades.
Brad Holcomb: Well, I’ll be honest the process of developing each year, since then has been more challenging than it has been before because things just don’t look the same. As I’ve said, it’s been a recovery and shifts and starts and that place that I have worked with the computer model sometimes. Again, we’re in somewhat unprecedented territory and I don’t know how long that’s going to persist but what I can say in the last four months, it feels like we’re out of pretty solid position and at least position for a continuation of good growth in manufacturing.
Tim Grady: And that’s great to hear and we’ll take a quick commercial break here and we’ll be back shortly.
And now back to our in-depth discussion of what lies in history for you. You guys are coming up with some interesting statistics that don’t pop out into first land share.
Lewis Weiss: The purpose of the report in ISM, I can persist should really be placed on what’s behind it and Brad we’re kind of encouraged to hear you say that it looks like we’re building up some momentum. There’s no predicting it, but I’m sure that the listeners are happy here that there are some kind of momentum. You know the other thing that seems to be lacking out there is employment. I know the unemployment number seems to be going down but I don’t see the creation of jobs at a phase that would be driving that.
Brad Holcomb: Right, right.
Lewis Weiss: How do you see employment?
Brad Holcomb: Well, employment overall I think is rather perplexing. Everyone that I talked to doesn’t quite understand all of the reports and the implications of how many people are actually employed versus people and those that are added in various sectors relative to those that have stopped looking. So it’s kind of confusing I think to the best of us. But from a manufacturing perspective, one of our keys sub indexes is employment in terms of the diffusion index and it’s been growing for four consecutive months. And it’s been growing largely since we started to climb out of the recession with just a few data points that are below 50. So when we say that employment is growing, a number of this month is 53.2, we’re talking about adding select jobs and we’re talking about filling open positions and strategic positions within manufacturing and an appetite to do that in order to keep up with new orders and production requirements. So in general our employment trusts and direction has been positive but it doesn’t translate into big numbers in manufacturing because of a couple of things. One again, it’s only 11 to 12% of GDP and second, manufacturing has continuously been devoted to efficiency and effectiveness through automation and that continues to be a factor and really limiting the amount of employment that manufacturing represents. It’s not to say there are many, many jobs and good jobs, it’s simply a matter of fact that companies also look for productivity gains whenever possible.
Tim Grady: Okay.
Brad Holcomb: Let me just interject –
Tim Grady: Sure.
Brad Holcomb: – because we talked about prediction and forecast and things like that, that gives me an opportunity to let the audience know of two other reports and those are what we call semi-annular reports that I also write along with my colleague Tony Nieves who does the non-manufacturing report. And the semi-annual report is a forecast. It’s first published in December and you can find this on the website. It’s published in December and then it’s refreshed a few months later such as April or May and it’s the same panel of 350 people on the manufacturing side as well as their corresponding panel on manufacturing side, forecasting what’s going to happen 12 months ahead and then as I said it’s refreshed in April or May. So in the latest refresh of the semi-annual report in late April, the panel has predicted a 4. – I think it’s a 4.8% growth in overall revenue for manufacturing in 2013 so that’s a pretty decent growth rate in terms of revenue. I would suggest that we didn’t get a whole lot of that in the first half of the year, but we seemed to be getting it and getting sort of caught up to that in the second half of the year. So I think what we’re seeing is consistent with the latest forecast in the same panel.
Lewis Weiss: Brad in the report, you have a section called what respondents are saying and you about 10 to 15 different industries reporting good comment and it’s pretty much a mixed bag of doom and gloom or yippee or hitting home runs. Is that pretty much across the board of all the comments that you get?
Brad Holcomb: No. Many people tell me it’s just an interesting, if not more interesting than the numbers. So we get hundreds and hundreds of verbatim comments from our panelists and I do my best to come through all of those and select about 10 to actually put in the report and so what you see is my best effort to be representative of all of those comments. And this month from my perspective, they’re mostly positive. For example, textile mill and there’s been a lot of news reports and headlines “new business is blooming.” That’s the quote. Here’s one from furniture and related which outlined to housing. “Business continues to improve every month for the past nine months.” One from food and beverage industry, “Big buck stores discounting, providing increased sales for short terms.” So a lot of positives but as you said there are a few that are sort of on the other side and one from machinery and that’s been sort of under pressure for the last year or so. Our customers continue to be cautious and are closely managing their purchases. Business continues to be flat to slightly down. So there’s definitely a mix. But what I can say in general is this the opportunity for our panelists to try in and provide some insights above and beyond or beneath how everyone has say it the numbers themselves. The numbers represent what’s going on this month specifically. The comments are a little bit broader and provide a different kind of insights from the manufacturing perspective.
Tim Grady: Okay. Well, that’s great. We’re going to take another quick break here, Brad and then when we come back, we have a couple of questions coming in by email and then we’ll wrap up the show. So let’s take a commercial break.
And now back to our guys, talking about the nuts and bolts of the report that just came out here.
Lewis Weiss: Brad, I have a question for you. I notice during the break and also from knowing your organization that you’ve got branches, divisions, affiliations globally, how does that work? How do they particularly their numbers? Is that something that you’re involved with on an international basis or you just told them the knack on how to do it?
Brad Holcomb: There are a couple of different ends. When we talked about affiliates of ISM, there are independent organizations which are aligned with us and which procurement and supply management professionals as they belong to ISM worldwide. So it really refers to the membership of the organization when we talked about affiliates. But there is another aspect that I think you’re little getting into and that is many other countries produce what called a PMI. People will be familiar with the China PMI, the Euro zone PMI, Japan, Korea, etc. Taiwan is one and the Middle East. Each one of those PMIs is modeled after the precedent that we set and utilizing our general model. In most cases, we have directly sat down with those representatives in years has passed to pass along our model and then those organization worked to develop the panels and the process and detail for their countries. It’s not to say that every implementation is exactly the same as ours, but certainly they’re modeled after ours in a more general way. We don’t control them at all, we’re not actively participating on a daily, week, or month or annual basis but we have helped them to set them up in the past years.
Lewis Weiss: Brad, based on your experience, the information that’s coming out and some of the international “PMIs” the delicate question is how valid is the information that’s coming forth? Is that something that you can comment on without beating up the competition?
Brad Holcomb: Well, I don’t view them as competition. I look at those indexes with great interest and what I look for for the most part is consistency and trend as opposed to specific number of each month. And I find them to be understandable. They seemed to make sense maybe not in a particular month but certainly on a trend basis. So I have no quarrel with any of them. I’d also say that there are regional PMIs in the United States such as Chicago. There are some that are produced by the said branches. There is one in Dallas here that looks a little bit different. But again, none of those are connected nor that we rely on any of original reports for our data which is to say that our data and our process is independent of anything and everything else and it’s been consistently in place for many many years and I think that’s exactly why they looked at so religiously to use the term by economists, by the Fed, by companies, by Wall Street, and by manufacturing companies.
Tim Grady: Well, it’s certainly an excellent report Brad. And I know you produce more than just this report. We produce several reports with ISM, but where can people find that information?
Brad Holcomb: ISM’s website is www.ism.ws and I’m looking at it right now under Publications. The first bullet is Reports on Business and there are a number of different sections including the manufacturing report on business, the non-manufacturing. There’s even a brochure on how this is put together. We touched on many of the aspects today but actually we’re just sort of scratching the surface in this instance, but there’s a brochure, there’s the semi-annual reports, there’s discussion about the seasonal adjustments and the process and there’s previous data. So people can dig in. They can dig in to their specific industry, they can start and try the things on their own to try and make sense out of them. And one other thing that we haven’t talked about is on the space of every monthly report is the section called commodities reported up and down in price and in short supply. I think this is an excellent opportunity for people in companies to appreciate commodities that are going up in price like this month coordinated boxes, some resins, some of the steel products, products which are going down in price. Caustic soda is the only this month. Commodities in short supplies, some electrical components and helium. People bought and certainly buyers and planners can look at this and it can impact the strategies and tactics on when and how to buy.
Tim Grady: Brad, we’re talking before about email call-ins and we do have quite a few of them here. We’re running out of time but I also – our engineer has point out that you pretty much answered the emails that we’ve gotten in so you kind of preempted the reading of the emails and answer the questions. So I appreciate the insight from you.
Brad Holcomb: Excellent.
Tim Grady: Brad, we didn’t get as deep into the report as I’ve hoped and what we would like to do is look forward to another show in the near future and invite you back to be our guest. We’d love to have you on it.
Brad Holcomb: That’d be my pleasure. Thank you.
Tim Grady: And thank you.
Brad Holcomb: … we just scratched the surface.
Tim Grady: Yeah. All right, Lewis, thank you for your time. You’ve had some terrific insight with this report and shortly educated us here at Manufacturing Talk Radio about its importance and its impact. Thank you for your time today.
Lewis Weiss: Thank you.
Tim Grady: If you would like to know more about Manufacturing Talk Radio, we’re mfgtalkradio.com or on the ISM at www.ism.ws and for All Metals & Forge Group www.steelforge.com.
You’ve been listening to the MFG Manufacturing Talk Radio.