ISM manufacturing data for October is strong

While its key metric continues to show signs of fluctuation, the Institute for Supply Management (ISM) reported today that manufacturing activity in October remained firmly in growth territory.

The PMI, the ISM’s index to measure growth, headed up 2.4 percent to 59.0 in October (a PMI of 50 or greater represents growth), which erased the 2.4 percent decline in September’s PMI. October’s PMI matched August’s 59.0, which was just off its highest reading since March 2011’s 59.1.

The October PMI is 3.2 percent ahead of the 12-month average of 55.8, while economic activity in the manufacturing sector grew for the 17th straight month and the over all economy showed growth for the 65th consecutive month, ISM said. ISM also reported that 16 of the 18 industries it collects data from reported growth in October.

Each of the four key metrics in the report, including the PMI, grew from September to October. New orders, commonly referred to as the engine that drives manufacturing, rose 5.8 percent to 65.8, which is 0.9 percent off of its highest reading since April 2004’s 66.7, while growing for the 17th straight month. Production was up 0.2 percent to 64.8, which is its highest level since the 65.3 recorded in May 2004 while growing for the eighth straight month. Employment checked in at 55.5 for a 0.9 percent gain while showing growth for the 16th straight month.

A sampling of comments from ISM member-company purchasing managers included in the report was generally positive.

A food, beverage and tobacco respondent said that holiday orders are exceeding seasonal forecasts, with customers demanding additional quantities above prior forecasts and (lower) fuel costs and other positive signals appearing to create above normal demand. A furniture and related products respondent pointed to “strong and steady business,” and a computer electronic products respondent cited “another strong month in terms of business growth.”

In an interview, Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, explained that the October PMI said that the report’s gains in October were very broad-based, with its key supporting metrics all above 50 and moving in the right direction.

“I would say that manufacturing is certainly running on all cylinders, especially in October,” said Holcomb. “We are certainly set up for a good solid finish in the fourth quarter and end of the year. That trend has been there all year. We had a little bit of a slowdown in the rate of growth for September. But there is variability and we can’t have things continuously going up. We look at the over all trend and as you read between the lines in the data you see production at a ten-year high and backlog of orders increasing six points (from 47 to 53 in October) meaning there is a lot of production to be worked over in the next few months. We are set up well for a strong finish and good start to 2015.”

October prices dropped six percent to 53.5 in October, with a fair amount of that decline due to lower fuel and energy prices, as well as commodity prices, according to ISM member comments in the report. Paying less for gasoline also equates into more money being spent on other things by consumers, which bodes well for economic output.

Supplier deliveries slowed at a faster rate in October, up to 56.2 from 55.2. Holcomb said that difference equates to suppliers having a harder time in October than in September in terms of keeping up with demand, in the case of raw materials going to manufacturing companies.

“In a sense that is good and bad news in that it reflects tightness in the supply chain,” said Holcomb. “This means that manufacturers need to work harder to keep up.”

IHS Global Insight U.S. Economist Michael Montgomery was somewhat bearish in assessing the ISM’s October data.

“The US third-quarter GDP reading of last week looked good with a solid expansion at a 3.5 percent annualized rate, but looked far weaker under the floorboards with only a 2.1 percent advance in gross domestic purchases, or GDP excluding the impact of imports and exports,” Montgomery observed in a research note. “Foreign trade and an anomalous spike in military spending made the quarter look great, but the military charge ahead will retreat and the export spike should founder on the same rocks that make foreign manufacturing weak in other nations’ manufacturing scores. This burst of manufacturing activity has lasted longer than we would have expected, but the lesson of 2011 remains—manufacturing booms seldom last unless based on surging final demand, and that ingredient is MIA in 2014.”