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August 2014 ISM

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The most recent report from the Institute of Supply Management (ISM) on the state of manufacturing for the month of August showed that growth in the U.S. manufacturing sector continues to outpace growth in the economy at large.

Not long ago such a situation would have been perhaps unthinkable. True, some of the current strength in manufacturing is cyclical—auto sales and associated production have now largely recovered from their deep dive in the 2008 financial panic, for example. But evidence continues to mount that suggests the favorable manufacturing trends are being driven by structural factors as well. The relentless push by firms of most every size, shape and country of origin to increase their productivity and reduce the time to market of new products (and services) combined with the proliferation of new productivity enhancing tools (3D printing and direct digital manufacturing, software simulation, advancements in material sciences supply chain management, the “internet of things”, robotics, etc.) are helping to power the manufacturing growth.

While it is reasonable to expect the ISM reading to cool some from August’s red-hot reading, the structural dynamics suggest the pace of manufacturing will, however, remain reasonably strong. While debate rages among some economists about the prospects for “secular economic stagnation” and economic troubles mount in Japan and the Eurozone, serious cyclical or secular troubles for the domestic economy are well off into the future. As a result, investment opportunities associated with the manufacturing revolution remain exciting.

Regarding the specifics of this report (full table is below):
• The all-important leading indicator (New Orders) was very strong.
• Inventory levels do not appear troublesome.
• Employment remains favorable.

In the ISM’s own words:

The past relationship between the Purchasing Managers Index (PMI®) and the overall economy indicates that the average PMI® for January through August (55 percent) corresponds to a 3.9 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI® for August (59 percent) is annualized, it corresponds to a 5.2 percent increase in real GDP annually.

(Real GDP, by the way, has been growing around 2%.)

NOTE: All figures except backlog of orders, customer inventories, imports, exports, inventories & prices paid are seasonally adjusted. The diffusion index is calculated by adding the percent of positive responses plus one half of those responding the same.

* A PMI™ reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A PMI™ in excess of 42.2 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.2 percent, it is generally declining.

The information contained in this report is based on sources believed to be reliable, but we do not guarantee its accuracy or completeness. The information is published for informational purposes and does not constitute an offer, solicitation, or recommendation of an investment or advisory services.