ISM reports another month of manufacturing gains in September

Manufacturing growth continued to hum along in September, according to the September edition of the monthly Manufacturing Report on Business issued by the Institute for Supply Management earlier today.

The PMI, the index used by the ISM to measure growth, increased 2.0% to 60.8 (8 (a reading of 50 or higher indicates growth), with the PMI now having grown for 13 straight months and the overall economy up for the 100th consecutive month. The PMI is currently at its highest level since August 2011’s 59.1 and is 7.6% higher than the 12-month average of 56.2 and 6% above the 2017 average of 57.1.

ISM said that 17 of the 18 manufacturing sectors contributing to the report grew in August, including: Textile Mills; Machinery; Nonmetallic Mineral Products; Transportation Equipment; Plastics & Rubber Products; Paper Products; Wood Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Chemical Products; Fabricated Metal Products; Miscellaneous Manufacturing; Petroleum & Coal Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; and Primary Metals. One industry, Furniture & Related Products, reported contraction in September compared to August.

Each of the report’s core metrics, including the PMI, saw gains in September.

New orders, which are commonly viewed as the engine driving manufacturing, saw a 4.3% increase to 60.8, growing for the 13th consecutive month. This marks a continuation of solid growth for this segment, as it has averaged 61.6% going back to December 2016, with these steady levels helping to drive production.

Production remained strong, rising 1.2% to 62.2 (a reading of 51.4 indicates growth and is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures), also growing for the 13th consecutive month. ISM said that it remains strong across most industries, despite weather conditions and supplier delivery constraints, which occurred in September.

Employment eked out a 0.4% increase over August to 60.3 (a reading of 50.5 is generally consistent with an increase in the Bureau of Labor Statistics data on manufacturing employment) and remained in growth mode for the 12th consecutive month. ISM said that employment levels have been expanding since October 2016, with September hitting its highest reading since June 2011’s 61.3.

Other key readings in the September report included:

supplier deliveries slowing at a faster rate at 64.4 (a reading above 50 indicates contraction), which was 7.3 points above August and growing for the 17th month in a row and hitting its highest level since July 2004’s 64.5;
inventories dipped 3% to 52.5 and were slower for the second straight month;
prices rose 9.5% to 71.5 while rising for the 19th straight month; and
backlog of orders was up 0.5% to 58.0, growing for the 8th month in a row
While the data in this report was largely encouraging, the impact of Hurricanes Harvey and Irma clearly had an effect on manufacturing operations in certain sectors, as was made clear in ISM member comments included in the report.

A chemical products respondent cited the hurricanes causing supply chain and pricing issues, and a plastics and rubber products respondent explained that while business is strong, there are concerns about price increases due to the hurricanes.

In an interview, ISM Manufacturing Committee Chair Tim Fiore said that new orders and supplier deliveries were the main drivers for continued improvement in the PMI, which were offset by a reduction in inventories.

“There is the question of what these numbers would look like without a hurricane,” he said. “In the comments we received, we heard things ranging from new orders being up because of the hurricanes to cannot get supplier deliveries to prices increasing. There were a lot of supply assurance and price issues, as well as comments about production output and new order entries. If you saw the reduction in raw material inventory was driven by the fact that suppliers struggled with delivery and that the reduction in raw material inventory is offsetting the increase in new orders that would have been there had it not been for the hurricanes, then the story is really all around supplier deliveries.”

Fiore reiterated that the 7.3% gain in supplier deliveries is a strong number, adding that 14 of 18 sectors reporting they struggled with supplier deliveries, estimating that at least half of that number was hurricane-driven.

And absent hurricanes, he said the September PMI would have likely not been quite as high and may have been in the 57-to-59 range.

Addressing the 9.5 percent jump in September prices, Fiore said that is also directly related to the decline in inventories and the perceived difficulty of getting supplier deliveries.

“They are somewhat inter-related,” he said. “If you are struggling with supplier deliveries, your raw material inventory is going to drop. That is no big surprise. But the customer inventory piece [up 1.0% in September to 42.0] is still way low even with production at 62.2. We still have a strong backlog number. When the dust clears on this, you need to ask at what point do supplier delivery constraints and low raw materials start to impact production? Because if production gets impacted, so will employment levels. So, if suppliers continue to struggle to deliver in October and raw materials inventories continue to slow, what kind of constraint will that have on production. I think the key here will be if customer inventories grow back to 52 or 53, then I will feel better about that. The only risk I see…is slow supplier deliveries and low raw material inventories.”