ISM reports another month of strong manufacturing output in October

Manufacturing continued its run of steady progress in October, according to the most recent edition of the Manufacturing Report on Business from the Institute of Supply Management (ISM).

The PMI, the index used by the ISM to measure manufacturing activity, increased 0.2 percent to 56.4 in October and stands as the new high for the PMI in 2013. It is also above the 12-month average of 52.8 and topped the 50 mark—which is the benchmark of strong economic activity—in ten of the last 11 months. The ISM added that economic activity in the manufacturing sector has expanded for five straight months, and the overall economy has grown for 53 consecutive months.

Including the PMI, two of the report’s four key metrics showed growth in October. New Orders, which are often referred to as the engine that drives manufacturing inched up 0.1 percent in October to 60.6 and grew for the fifth straight month. Production fell 1.8 percent to 60.8 but also remained in growth mode for the fifth straight month. Employment dropped 2.2 percent to 53.2 but is also still in positive territory for the fourth straight month.

Comments by ISM members in the report were mixed, with the recent 16-day federal government shutdown in October, having an impact on manufacturing operations in some cases but clearly not all.

A fabricated metal products respondent explained that the government shutting down and threatening to go into a default position caused a high level of concern in his company’s markets, while a textile mills respondent simply said “business is booming,” and a furniture and related products respondent said that business continues to improve every month for the last nine months.

“Overall, the impact of the government shutdown did not have much of an impact,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “Looking at the numbers, it has been an uneven year with the first half puttering along at an average of 51.5 (for the PMI) and the second half hovering between 55 and 56. The underlying metrics are pointing in a positive direction through October, which says something about where the next few months might be headed. We have every reason to believe the next few months will continue this trend.”

Other key metrics in the report were mixed, including: supplier deliveries up 2.1 percent to 54.7; inventories up 2.5 percent to 52.5; prices down 1.0 percent to 55.5; and backlog of orders up 2.0 percent to 51.5.

Addressing the ongoing strength of new orders, Holcomb pointed out it has been over 60 for more than three months, which he explained speaks to the ongoing strength of the manufacturing sector.

“It is true not only in manufacturing but in the economy over all,” said Holcomb. “Consumers are ultimately responsible for all of this activity, and it has certainly been strong for the last four months.”

Even with a mild dip on the production side, Holcomb said it is not a major concern as it has been in growth mode for the last four months, adding that backlog of orders—up 2.0 percent to 51.5—is growing rather than contracting, which speaks to the fact that production could have higher output but is being left for another day as manufacturers are managing their levels nicely.

Supplier deliveries and inventories were up 2.1 percent and 2.5 percent, respectively, at 54.7 and 52.5.

Holcomb said this is another indicator that the supply chain is tightening because of growth and demand, coupled with inventories being up as companies managing their inventories at a higher rate in anticipation of a continuation of current trends so they don’t fall short on raw materials.

Looking ahead to the rest of the year, Holcomb said prospects in manufacturing for the rest of the year are solid.

“If you look at the third quarter and how the fourth quarter ended up, coupled with overall positive comments from the panel, and the lack of a huge negative impact from the government shutdown, I think we are in for a continuation of this current level though year-end,” he said. “There is no reason for me to believe otherwise.”