Manufacturing: ISM report shows strong October growth

Coming off of September which showed a nearly 2 percent sequential decline, the most recent edition of the Institute of Supply Management’s Manufacturing Report on Business showed signs of improvement in October.

The index the ISM uses to measure the manufacturing sector, or PMI, was 56.9 percent in October, which is up 2.5 percent from a 54.4 percent reading in September. Any reading that is 50 or better represents economic growth. September represents the 15th consecutive month that the PMI is more than 50, coupled with the overall economy on a growth track for 18 straight months.

“The manufacturing sector grew during October, with both new orders and production making significant gains,” said Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management Manufacturing Business Survey Committee, in a statement. “Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month’s report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy.”

Significant readings from the October report include: New Orders at 58.9 percent (up 7.8 percent from September); Production at 62.7 percent (up 6.2 percent from September); Employment at 57.7 percent (up 1.2 percent from September); Inventories at 53.9 percent (down 1.7 percent from September); Backlog of Orders at 46.0 percent (down 0.5 percent from September); and Prices at 71.0 percent (up 0.5 percent from September.

In an interview with Modern, Ore said that last month’s PMI likely raised more questions than it answered, with several “disconnects” like Inventories and Production outpacing New Orders, which led to creations as to why Production was up when inventory is being created and New Orders were falling for 1.5 percent per month for a number of months.

“This month we probably got answers to almost all of our questions,” said Ore. “We are now seeing New Orders outgrowing Inventories, even though Inventories are above 50 percent and pretty strong, New Orders are still growing faster. What we saw last month was New Orders were above 50 and Inventories were above 50 and growing faster. What is unusual is when New Orders are below 50 and Inventories are above 50; it is rare that we see that and we were wondering why that happened last month.”

With a recovery in New Orders, which is typically tied closely to Production, although they have not been recently, Ore said that a lot of what happened was that a lot of manufacturers fell behind on production and on some of their finished goods inventory that they needed to have available.

And going to back to August 2009, New Orders were outgrowing Inventories by 28 points. This was due to “holes” in companies’ inventories, according to Ore. Some of this was created by companies cutting back on a specific model—or SKU—of something they manufacture. But these changes are often brought back into production at a later date, although when manufacturers cut back or eliminate production on a certain item, it creates a shortage of inventory for specific items.

“The situation now is that Production has remained strong, and New Orders have picked up again,” said Ore. It also appears that Customer Inventories are much lower than people feel what they would typically see in their supply chains, and that is a positive going forward.”

Manufacturing activity over the first half of a calendar year is typically flat, said Ore, and the second half is where you see more growth, especially in the fourth quarter due to the holiday season.

And with New Orders up nearly 8 percent in October, there is evidence that strength will carry over into November and December and into January, according to Ore.

Manufacturing: ISM index dips down in September
The Institute of Supply Management reported that manufacturing activity in September was down compared to August.

ISM manufacturing index inches up in August
The Institute of Supply Management reported that manufacturing activity in August was up slightly compared to July.