Manufacturing grows in October but at a lower level, reports ISM

Even with the fourth mild sequential decline in a row, manufacturing in October still showed growth, according to the most recent edition of the Institute for Supply Management’s (ISM) Manufacturing Report on Business.

The PMI, the ISM’s index to measure growth, was 50.1 in October, which was down 0.1 percent from September and now at its lowest level since May 2013, when it was also at 50.1. The PMI has been at 50 or higher for 33 consecutive months, with the over all economy growing for 77 months in a row. The current PMI is 1.6 percent below the 12-month average of 52.7.

Two of the report’s four key metrics, which includes the PMI, were down in September. Employment fell 2.9 percent to 47.6, which is its lowest level going back to the 46.1 recorded in August 2009. On the growth end, production headed up 1.1 percent to 52.9 while growing for the 38th month in a row, and new orders, often cited as the engine that drives manufacturing, rose 2.8 percent to 52.9 and growing for the 35th straight month.

Of the 18 manufacturing sectors tracked by the ISM, seven grew in October and were led by the nation’s three largest manufacturing sectors: food beverage, and tobacco products; chemicals; and computer and electronic products.

Comments submitted to the report by ISM member respondents were mixed depending on industry.

A paper products respondent said that while demand remains steady, dollar sales are flat due to currency and cost changes, and a computer and electronic markets respondent said that the energy market continues to struggle, with the effects starting to bleed into other areas.

Brad Holcomb, chair of the ISM Manufacturing Survey Business Committee, said even with the PMI decline there are things to like in this report such as gains in production and new orders, as well as backlog of orders up 1.0 percent to 42.5. Conversely, though, he said the decline in employment was not great news.

“I think we are at a high state of [manufacturing] employment in terms of numbers of people at work, which is what we consider, as opposed to wages, which is a key indicator for others,” he said. “This is just a pause and a reflection of pretty solid employment growth already. Employment can rebound to some extent, although automation is a factor in these numbers to be sure. We need to get quality people on the shop floors operating and running things. We will continue to grow. I think this is a momentary decline, and I feel these numbers will set us up for a good remainder of the fourth quarter.”

With new orders up in October, coupled with production also up, inventories in October dropped 2.0 percent to 46.5, which ate into inventories, with Holcomb noting it is a prudent management strategy for manufacturers to keep inventories low at this point in time while customer inventories remain on the higher side (down 3.5 percent in October to 51.0, which ISM considers too high), which can make manufacturers somewhat cautious about new orders.

“New orders are arriving now so I think we will see those inventories go up,” he said. “Being down in the low 50s is not a bad thing at this juncture, and it takes down the PMI to the extent that were it higher, the PMI would be higher and the direction it would move.”

When asked about the impact of economic issues in some global regions on manufacturing, Holcomb described it as being overstated, explaining that China, for example, does not represent a huge amount of U.S. manufacturing export activity, adding that U.S. manufacturing is more closely tied to domestic consumption and remains on top with respect to manufacturing.

As for the remainder of 2015, Holcomb said new orders require attention, with 8 sectors showing new order growth in October, coupled with fourth quarter activity being a time for active consumer spending and manufacturers utilize available budgets as the year winds down.

Another factor is prices being low for 12 straight months (up 1.0 percent to 39.0 in October) continues to help most of the manufacturing sector control costs in terms of the costs of running plants and producing materials, which Holcomb said helps with margin growth and profitability.

“That was help to fan the flames,” he said. “I think we are set up for a strong fourth quarter.”