This week, U.S. and select global equity markets experienced a significant selloff in stocks. The principle headline for the Wall Street Journal and other business media was that markets are spooked from a round of weak manufacturing activity reports, primarily concerning the United States. It is amazing that Wall Street now pays so much attention to supply chain and manufacturing indices, a rather clear sign of how procurement, manufacturing and supply chain activity across the globe has become so indicative of the state of the global economy. That is why we now include a trending summary report of key PMI activity across the globe in our Supply Chain Matters Quarterly Newsletter.
Candidly, we do not view the latest January PMI activity as overly concerning, rather an indication of the dynamic planning of today’s industry supply chains responding to supply and demand needs in their particular markets.
The Institute of Supply Management (ISM) PMI reflecting manufacturing activity across the United States posted a 51.3 reading in January, which was a decrease of 5.2 percentage points from the December level of 56.5. While the headline may be concerning, that level of 51 was the same as reported in December 2012 and again in March 2013. It remains an indicator of expanding activity. A look into detailed indices reflects that the contraction probably had more to do with lousy winter weather, coupled with supply and inventory adjustments. Of the 18 total manufacturing industries that make-up the index, 11 reported growth in January. Many were in the lower tier of industry supply chains such as metals, plastics, rubber and electrical components. While the new orders index indeed decreased by 13.2 percentage points, customer and other inventories also decreased reflecting a work down of current inventory.
If there is a concern, if should be directed at increasing input prices where the index rose 7 percentage points. It was our prediction that commodity prices would hold level in 2014 given the trends going into the start of the year. Procurement teams need to be especially vigilant regarding this trending.
Business media has further reported that the current sell-off across global equity markets has been motivated by concerns regarding ongoing turbulence among former growing emerging market economies and the effect that will have on corporate profits. Supply chain leaders should share that concern. However, we advise a continued monitoring of overall global supply chain activity, which up to January, indicates continued positive trending. Including January, the J.P. Morgan Global Manufacturing & Services PMI which is an indication of the combined output of the world’s manufacturing and service sectors has risen for 16 successive months. In January, the Markit Eurozone Composite PMI reflecting manufacturing activity across the Eurozone, a huge global market, posted its highest reading since June 2011 indicating momentum across Europe is finally on the upswing.
The one concerning manufacturing indicator is that of China, which dropped below the 50 mark in January, to a reading of 49.5, which is an indicator of contraction. That indeed should remain the concern of industry supply chains and investors.
It is unfortunate that Wall Street continues to take such a narrow, in the quarter perspective concerning corporate growth and profitability. While industry supply chains are becoming much more adept at responding and synchronizing product demand and supply imbalances  on a quarterly, monthly and even daily basis, Wall Street continues to view manufacturing activity in a rather short term, in-the-quarter mentality.
That does not help companies and supply chain teams in their efforts to continue to invest in capabilities for managing complex, dynamic and ever changing global supply chains.
Bob Ferrari
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