ISM report points to strong August manufacturing output

Manufacturing growth remained intact in September, rising for the fourth consecutive month, according to data issued today by the Institute for Supply Management (ISM).

In its monthly Manufacturing Report on Business, ISM reported that the report’s key metric, the PMI, came in at 55.4 (a reading of 50 or higher indicates growth), which was nearly even with August’s 56.0 reading. And it added that the overall economy was up for the 131st consecutive month. The September PMI is 5.6% above the 12-month average of 49.8 and stands as the second-highest monthly reading over that period, behind August.

ISM reported that 14 of the 18 manufacturing sectors it tracks saw growth in September, including: Paper Products; Wood Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Electrical Equipment, Appliances & Components; Nonmetallic Mineral Products; Fabricated Metal Products; Chemical Products; Miscellaneous Manufacturing; Plastics & Rubber Products; Machinery; Textile Mills; Computer & Electronic Products; and Transportation Equipment. The four industries reporting contraction in September are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Petroleum & Coal Products; and Primary Metals.

The report’s key metrics were mixed in September.

New orders, which are commonly referred to as the engine that drives manufacturing, slipped 7.4%, to 60.4, while remaining in growth mode for the fourth consecutive month. This followed August’s 67.6, which represented the highest reading going back to January 2004’s 70.6.

Production—at 61.4—was off 2.3% compared to August’s 63.3, which was its highest reading since January 2018’s 64.2, while still up for the fourth consecutive month, with five of the top six manufacturing sectors still growing in September. And employment—at 49.6—headed up 3.2%, growing at a slower rate for the 14th consecutive month.

Supplier inventories—at 59.0 (a reading above 50 indicates contraction)—was basically even with August’s 58.2 and slowed at a faster rate for the 11th consecutive month, with ISM pointing out that it indicates how suppliers are still struggling to deliver, coupled with transportation challenges and continuing difficulties in supplier markets still serving as constraints to production growth. Inventories—at 47.1—were up 2.7% compared to August’s 44.4, contracting at a slower rate for the third consecutive month, with the report observing that inventory levels remained in contraction due to continued strength in production and ongoing supplier difficulties.

Comments from ISM members included in the report were somewhat mixed, with COVID-19 and upticks in business again serving as the key themes.

“Retail sales remain strong, but food service is still down about 15 percent year-over-year,” said a Food, Beverage & Tobacco Products respondent. “All of our factories are still struggling with manning shifts due to positive COVID-19 cases and/or quarantine because employees came in contact with someone who contracted the virus.” And a petroleum and coal products respondent indicated business has not begun to recover.

In an interview, Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee, described the report as surprisingly good.

“It is a really good performance, with an equal expansion rate from August to September, as July to August,” he said. “The new orders number was very strong, and new export orders, at 54.3, growing. Inventories remained low, and backlog of orders [at 55.2 and growing at a faster rate for the third straight month] solid. Everything on the demand side is good so assuming the environment remains the same…in a COVID-19 environment, where you have social distancing across many industry sectors and the absenteeism you would expect, the sector able to deal with it. And employment is also back into expansion range again and is coming back, with production at 57 or better for four straight months. Overall, it is a really good report. I cannot find a single fault with this report.”

On the input side, he said suppliers are still struggling, due in part to the hurricanes and fires in different parts of the country in September, with things getting somewhat better, which is expected over time, adding that any incremental improvement was likely offset by the hurricanes.

Looking ahead, as conditions improve for suppliers, Fiore said it is likely that suppliers deliveries inch down to the 57 range in October, with inventories likely to head up to around 49, as inventory counts see some growth.

On the pricing side, August prices—at 62.8—headed up 3.3%, growing at a faster rate for the third straight month, which Fiore said indicates suppliers are having difficulties and are passing on price increases to customers and struggling with transportation issues.

When asked to provide an outlook for the manufacturing sector for the balance of 2020, Fiore said that post-Thanksgiving, it will be known whom the next President is, which will be a positive, and is much better than not knowing.

And he also added that it is unlikely there will be a fiscal stimulus before the election, which he said is very disturbing.

“My point here is that consumer confidence came back in September, with consumer sentiment numbers trending positive,” he noted. “But when we see those layoffs and all of those weakened industries, you have to be concerned…and there a lot of people affected by it. I think the biggest [tailwind] to growth here is that Congress and the Administration cannot agree on some amount of continuing stimulus. There needs to be some type of soft landing. If you take all of the money out of the economy, there is no way that the economy can withstand a 1.5%-to-2% growth profile. We are probably growing dramatically more than that in the third quarter, and I think we are coming out of a manufacturing recession, with Q1 and Q2 being a manufacturing recession. I am hopeful Q3 is positive, but the biggest threat here is that you are withdrawing all of this government money, and there is nothing to replace it.”