ISM: Manufacturing Continues Upward Momentum
Economic activity in the manufacturing sector expanded in October for the fifth consecutive month, and the overall economy grew for the 53rd consecutive month, say the nation’s supply executives in the latest Manufacturing Institute for Supply Management (ISM) Report On Business.
“The October report on U.S. manufacturing activity from ISM contributes to growing evidence that modest improvements in global financial stability and growth are benefiting U.S. factories,” said Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “The Purchasing Managers’ Index (PMI) rose slightly from 56.2 in September to 56.4 in October, the highest level for this closely watched leading indicator of factory sector performance since April 2011.
“The demand components of the index were notably positive, with the new orders component remaining above the strong 60 percent level and the backlog of orders, a measure of the pressure on the factory production schedule, increasing nicely from contraction territory in September to growth territory in October,” Waldman continued. “Neither the data nor the respondent comments in October suggest any measurable impact from the government shutdown, although reports for coming months need to be interpreted carefully for any distorting influence of Washington difficulties.
“In recent months, the survey-based data from the ISM have painted a more optimistic picture of manufacturing performance than the industrial production reports from the Federal Reserve,” Waldman concluded. “Federal Reserve data show that the third quarter rebound from the modest contraction of manufacturing output in the spring was a disappointing 1.3 percent. Fed data also show that the slowdown in the U.S. housing recovery is impacting overall manufacturing performance. Taken together, the ISM data and the industrial production data suggest positive but muted near-term performance for U.S. factories, as the beneficial impacts of an improved global growth picture are at least somewhat neutralized by uncertainties about the sustainability of the rebound in key parts of the world and the potentially harmful effects of historic policy uncertainty in Washington.”
Manufacturing expanded in October as the PMI registered 56.4 percent, an increase of 0.2 percentage point when compared to September’s reading of 56.2 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.
“Virtually all of the underlying metrics feeding into the PMI are pointing in a positive direction for October,” says Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Business Survey Committee. “It’s just a really solid month showing continuation of what we started in the third quarter, now starting off in the fourth quarter.”
Orders, Production and Inventory
ISM’s New Orders Index registered 60.6 percent in October, an increase of 0.1 percentage point when compared to the September reading of 60.5 percent. This represents growth in new orders for the fifth consecutive month, at a slightly faster rate than in September. A New Orders Index above 52.2 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).
ISM’s Production Index registered 60.8 percent in October, which is a decrease of 1.8 percentage points when compared to the 62.6 percent reported in September. This month’s reading indicates growth in production for the fifth consecutive month, but at a moderately slower rate than in September. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.
“New Orders are above 60 for the third month in a row, which is very solid and growing for five consecutive months,” adds Holcomb. “Same for production. It’s been above 60 for four consecutive months and if you combine looking at production with the backlog of orders increasing — showing that there’s a build-up in essentially old orders yet to be filled — that says that production has metered itself.
“One of the arch principles of manufacturing is to level production each month, so that’s kind of what manufacturers are doing. They’re letting the backlog build-up a little bit, as opposed to producing into it, so that it will be there for when it’s needed. So very good numbers for both new orders and production. The fact that production is down 1.8 percent is really incidental and it doesn’t mean much. What is important is that both are above 60 points for three and four consecutive months.”
The Inventories Index registered 52.5 percent in October, which is 2.5 percentage points higher than the 50 percent reported in September. This month’s reading indicates that respondents are reporting inventories are growing relative to September’s unchanged reading. An Inventories Index greater than 42.7 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis’ figures on overall manufacturing inventories (in chained 2000 dollars).
“There’s a message there that manufacturing has the ability these days to really manage inventory to a certain level,” explains Holccomb. “Manufacturers have chosen to increase inventories to avoid falling short of raw materials as they expect a continuation of these new orders and production levels.”
ISM’s Backlog of Orders Index registered 51.5 percent in October, which is 2 percentage points higher than the 49.5 percent reported in September. This is the first month of expanding order backlogs since April 2013, when the index registered 53 percent. Of the 86 percent of respondents who reported their backlog of orders, 24 percent reported greater backlogs, 21 percent reported smaller backlogs and 55 percent reported no change from September.
Exports, Imports and Prices
ISM’s New Export Orders Index registered 57 percent in October, which is 5 percentage points higher than the 52 percent reported in September. October’s reading reflects growth in the level of exports relative to September, and is the highest reading since April 2012 when the index registered 59 percent. This month’s reading also represents the eleventh consecutive month of growth in new export orders.
ISM’s Imports Index registered 55.5 percent in October, which is 0.5 percentage point higher than the 55 percent reported in September. October’s reading reflects growth in the level of imports relative to September, at a slightly faster rate. This month’s reading also represents the 11th consecutive month that the Imports Index has registered at or above 50 percent.
“The Exports Index up five points is pretty significant,” says Holcomb. “Exports mostly refers to the export of finished goods, although some assemblies may be involved there. It just shows you that the global economy likes U.S. products, likes its pricing and is buying at a higher rate.
“The imports of raw materials is also at a very solid number at 55.5, showing that there’s favorable pricing and availability from the international community for certain raw materials. I think it’s a reflection of what we hear about China, Japan and Europe all being in positive territory and that reflects in the U.S. numbers.”
The ISM Prices Index registered 55.5 percent in October, which is a decrease of 1 percentage point compared to the September reading of 56.5 percent. This month’s reading indicates an increase in raw materials prices for the third consecutive month. In October, 22 percent of respondents reported paying higher prices, 11 percent reported paying lower prices and 67 percent of supply executives reported paying the same prices as in September. A Prices Index above 49.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Index of Manufacturers Prices.
“Prices are very much in check,” explains Holcomb. “You’d expect numbers to be above fifty, because it’s just the way things are. We’re not at all concerned about price inflation at this point or for the foreseeable future. Overall this year, expect pricing to be moderate in terms of increases.”
ISM’s Employment Index registered 53.2 percent in October, which is 2.2 percentage points lower than the 55.4 percent reported in September. This month’s reading indicates expansion in employment for the fourth consecutive month, but at a slower rate than in September. An Employment Index above 50.5 percent, over time, is generally consistent with an increase in the BLS data on manufacturing employment.
“The Employment number is still quite positive at 53.2,” says Holcomb. “It’s probably going to jump up a little bit over the next couple of months due to seasonal hiring, but it will stay in this range. It does translate into growing jobs, although not at the rate that everybody would like.”
Respondents and the Shutdown
There were a number of comments from respondents this month regarding the government shutdown, most of which say there was no discernable impact on their business. October’s numbers also do not indicate anything attributable to the shutdown or default discussion. That’s not to say that there might be something later on, but it is doubtful at this point.
“I think what this says is that manufacturing is responding to the marketplace and not to Washington,” adds Holcomb. “Consumers are as well, because they drive the whole system.”
The report doesn’t reveal evidence of anything manufacturing industries should be concerned about at this point. Aside from something out of the ordinary, continuation at this level is anticipated for the balance of the year.
“Again, virtually all of these indexes are pointing in the right direction,” explains Holcomb. “It’s just a great report and shows that the fourth quarter is continuing the momentum from the third quarter.”
In his role as the chair of the Institute for Supply Management Manufacturing Business Survey Committee, Bradley J. Holcomb writes the monthly Manufacturing ISM Report on Business based on the survey results of approximately 350 professionals across 18 different industry sectors. The report is released on the first business day of each month, and features the PMI Index as its key measure. For more information on the Institute of Supply Management, visit www.ism.ws.