ISM reports continued growth in manufacturing in October

Following three straight months of declining manufacturing output, the Institute for Supply Management (ISM) reported today that the manufacturing sector grew in October for the second straight month.

The PMI, the index used by the ISM to measure manufacturing activity, was 51.7 in October, which was 0.2 percent better than September’s 51.5 and 2.9 percent better than the 49.6 recorded in August.

A reading of 50 or higher indicates growth is occurring. Economic activity in the manufacturing sector had expanded for 34 straight months prior to June’s contraction and overall economic activity has expanded for 41 straight months. October was 0.5 percent below the 12-month average of 52.2.

Various components of the September Manufacturing Report on Business showed growth.

New Orders, which often are referred to as the ‘engine’ which drives manufacturing, increased 1.9 percent to 51.7, following a 5.2 percent September gain and a 0.9 percent decrease in August. It also grew at its highest rate since May. And Production headed up 2.9 percent to 52.4, following a 2.3 percent bump from August to September.

“I was delighted to see that we beat the estimates [for the PMI] for October and staying in growth territory,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “I think that can continue. There are also some other positive economic signals out there, too, including consumer confidence going up, the PMI in China increasing. Europe is still problematic, though. There is also some anticipation as the election cycle comes to a close next week and we put that behind us and go forward.”

Looking back to a year ago at this time, Holcomb said that the annual cycle manufacturing is in—in terms of ups and downs—are somewhat similar. And the last two months of 2011 grew consecutively and there is a chance that can happen again this year, he said.

New Orders in October were driven by some of manufacturing’s largest industries, including Food, Beverage & Tobacco products and Computer & Electronic products, which is the largest manufacturing sector covered by the ISM.

Along with the five sectors reporting growth in New Orders, Holcomb said that five others remained at 50, which carried the day for October growth.

Production was also positive and Holcomb explained it was driven by both New Orders, coupled with working off the Backlog of Orders, which declined 2.5 percent in October to 41.5.

“That is the lowest number for Backlog of Orders since September 2011,” said Holcomb. “Hopefully, we won’t have to do that anymore and the backlog will remain strong so that it provides some flexibility.”

Employment dropped 2.6 percent to 52.1 Holcomb noted this is still a good number and reflects caution looking ahead and is not unexpected as year end approaches. In order for that number to get higher, he said confidence needs to increase.

ISM respondent comments included in the report were mixed, depending on the specific manufacturing sector a respondent is in. One in the furniture and related products sector said business is picking up, while a paper products respondent said that market is still very soft.

Holcomb said the majority of the comments were more towards “the market is soft and demand is slowing to weak than otherwise,” which he said present a somewhat different story than the numbers themselves and shows there is more work to be done still and the overall global economy remains fragile. This set of comments presents what Holcomb called a lukewarm environment.

Inventories fell 0.5 percent to 50.0 in October. This is down from the 53.0 recorded in August, which Holcomb said at the time may be unwanted inventory.

“That is not the case anymore,” he said. “This is a reflection of manufacturers adjusting their inventories according to demand and production. Production has eaten off any excess inventory. It is pretty balanced right now at 50.0. It really cannot get any more balanced than that.”

October Prices fell 3 percent to 55.0. The ISM list of commodities moving up or down in price is relatively small, said Holcomb. And the current reading of 55.0 represents an “in control” situation, with modest price increases not worrisome one way or the other.