NAPM index climbs but stays below 50%

TEMPE, AZ — Although the purchasing managers' index rose for the third straight month in April, the index shows that the manufacturing sector is still in some pain.

Compiled by the National Association of Purchasing Managers, the index finished last month at 43.2 percent, up from 43.1 percent in March. Despite the increase, an index result of less than 50 percent indicates a decline in the overall sector.

Observing that the index has not seen the 50 percent mark for nine consecutive months, Norbert Ore, chairman of NAPM's manufacturing business survey committee, said, "The overall picture is one of continued decline in manufacturing activity. [Manufacturing] continues sluggish at best. Major concerns are energy costs and softening demand across many markets."

Ore noted "soft starts" to several of the component indices, including production, employment, new export orders and imports. All of these were below 50 percent in April; employment, finished below 40 percent.

Ore did find some encouragement in the under-40 percent reading for the inventories index, which indicated a faster rate of inventory liquidation.

The slight change in the overall index was "nice in that it supports the premise of stabilization in the much-troubled manufacturing sector," said Anthony Karydakis, analyst with Banc One Capital Markets. "An encouraging sign … was the fairly sizeable rise in the new orders component to 45.9 (percent) from 42.3 (percent) in March, suggesting that production could start improving in the coming months."

David Orr, chief economist with First Union Economics Group, also zeroed in on the new-orders result, calling it "the most leading component of this survey. (This index's) move up from 37.8 (percent) in January fits with the significant clearing out of inventories. Also encouraging were the components with the most information about inflation."

Regarding the latter point, Orr cited the price index's drop and a decline in the supplier delivery index. The latter indicator's behavior confirms "that capacity exceeds demand, and will help constrain prices."

Yet, cautioned Dick Rippe, managing director and chief economist of Prudential Securities, "the industrial sector's recession is not over, according to these numbers. Almost all of the components continue to look weak."

With inventories very much on NAPM's and the analysts' minds, the association included a special monthly question on companies' inventory levels. Twenty percent of the responding purchasing executives rated their inventories as too high (up from 19 percent in March), an equal 20 percent felt they were too low (up from 15 percent in March) and 60 percent said theirs were at the right level (down from 66 percent in the previous month).