Manufacturing gets back on track in September, reports ISM

Coming off of its first decline after a five-month stretch of growth, manufacturing activity in September showed a bounce back of sorts, according to the most recent edition of the Institute for Supply Management’s (ISM) monthly Manufacturing Report on Business, which was issued today. 

The PMI, the index used by the ISM to measure growth, was 51.5 (a reading of 50 or higher indicates growth), topping August’s 49.4, which was the first decline going back to February’s 49.5. September’s PMI was 1.2 percent above the 12-month average of 50.3. And the ISM said that the over all economy expanded in September for the 88th month in a row.

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

New orders, which are often cited as the engine that drives manufacturing, showed a very strong rebound from August’s 7.8 percent decrease (its first since December 2015’s 49.8), with a 6.0 percent increase to 55.1 and nine industries reporting growth. And production headed up 3.2 percent to 52.8, helping in part to cancel out a 5.8 percent August decrease, which saw it at its lowest level since August 2012’s 49.5. Employment was up 1.2 percent to 49.7, making up for a 1.2 percent August shortfall.

ISM said that of the 18 manufacturing sectors contributing to the report, seven reported growth, including Nonmetallic Mineral Products; Furniture & Related Products; Textile Mills; Food, Beverage & Tobacco Products; Computer & Electronic Products; Miscellaneous Manufacturing; and Paper Products.

The 11 industries reporting contraction in September were: Printing & Related Support Activities; Petroleum & Coal Products; Wood Products; Apparel, Leather & Allied Products; Transportation Equipment; Machinery; Plastics & Rubber Products; Primary Metals; Fabricated Metal Products; Chemical Products; and Electrical Equipment, Appliances & Components.

Comments from ISM members included in this month’s report showed fairly positive feedback over all. A machinery respondent noted that general business conditions are slowly improving with increased sales and sales leads, and a furniture and related products respondent pointed to increasing furniture sales. 

“Things took a breather [in August] and are nicely back where I thought it could be and should be,” said Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, in an interview. “I like all the numbers in this report. The comments in this report are also leaning positive, too, with people looking at the finish line now that we are in the fourth quarter and they are feeling pretty positive about things.”

Holcomb also pointed to backlog of orders approaching the 50 mark, up 4.0 percent to 49.5, which indicates a good backlog pipeline for continuing order activity. This speaks to a larger increase in new orders when compared to the increase in production, with production not quite able to keep up with new orders while eating into the backlog of orders. And he said that this is in a real good territory, with plenty of backlog to accommodate fluctuations in production, labor, and assets.

September inventories remained in contraction mode despite a 0.5 percent increase to 49.5, and prices were flat at 53.0.

With September largely recovering from a down month in August on multiple fronts, Holcomb explained that sentiment focused on a so-called manufacturing decline may be somewhat overblown.

“Many people are influenced by political rhetoric that likes to say that manufacturing is not in good shape and lots of jobs have been lost,” he said. “Political rhetoric is just that; it does not deal with the facts or the history or the projections or certainly not the data. The data says that the economy has been growing for 88 consecutive months. We have had a slow and satisfactory year with some ups and downs, but I see no reason why we cannot continue in a positive fashion to finish off the year.

And with 2016 being an election year, he said that the election has no major impact on manufacturing output as companies have already factored in election-related ramifications into their businesses months in advance. As an example, he observed that out of the hundreds of comments submitted for the report, there was not one mentioning politics or the election.

Addressing manufacturing employment, Holcomb said that while it is below 50 and contracting, that is not necessarily a bad thing.

“I continually have to remind people that there are strong levels of employment in manufacturing,” he said. “We have predicted since May that it will be at 50 or no growth for the rest of the year, because it’s a low growth year, nevertheless positive. There will be some gives and takes in employment on the whole. It will not likely be above 50 any time soon. It is pretty normal and nothing to be concerned about at all. As far as all the numbers, it kind of fits like a puzzle this month, with no guessing. It just means we are in pretty good shape and back on track.”