Manufacturing growth continues in September, reports ISM

Even though some of its key metrics dropped sequentially from August to September, the outlook for manufacturing over all remains strong, according to the most recent edition of the Manufacturing Report on Business issued today by the Institute for Supply Management (ISM).

The PMI, the ISM’s index to measure growth, fell 2.4 percent to 56.6 in September (a PMI of 50 or greater represents growth), coming off of August’s 59.0, which was just shy of its highest reading since March 2011’s 59.1. The September PMI is 1.0 percent above the 12-month average of 55.6, with expanding in the manufacturing sector for 16 straight months and the over all economy growing for 64 months through September. Even though growth remained intact, September marked the first month on a year-to-date basis that the PMI did not see sequential growth. The ISM also reported that 15 of the 18 industries it collects data from reported growth in September.

Of the report’s four key metrics, including the PMI, three declined from August to September. New orders, commonly referred to as the engine that drives manufacturing and coming off its highest reading since April 2004’s 66.7, decreased 6.7 percent to 60.0 and continued growing for the 16th straight month. Production inched up 0.1 percent to 64.6, and employment was down 3.5 percent to 54.6 and still growing as the ISM notes an employment index above 50.6 is consistent with an increase in the Bureau of Labor Statistics manufacturing employment data.

September capped off the strongest quarter of the year, with an average PMI of 57.6, with the first and second quarter averages at 52.7 and 55.2, respectively, Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, on a media call earlier today.

When asked if there was any cause for concern regarding the drop in PMI, Holcomb said there is not because it is not typical for the PMI to keep rising month after month.

“The 59.0 in August was an incredible high…so September’s 56.6 is a good number,” he said. “Based on the strong quarterly PMI averages, there is continuing progression and upward momentum as we approach the fourth quarter.”

While new orders dropped and production was basically flat, backlog of orders in September fell 5.5 percent to 47.0. Holcomb said that production reflected working off the backlog of orders to the extent that there were labor and resources available. Even with the decline in backlog of orders, he noted that 47.0 is still a respectable number.

“If production were to drop into the high 50s, we would be happy with that,” Holcomb noted. “But based on the data, a significant drop-off is not likely at this point. Backlog of orders has been up and down over the last few months and is really a resource to maintain level production, which is seeing high numbers.”

Prices in September rose 1.5 percent to 59.5, and inventories fell 0.5 percent to 51.5. Supplier deliveries were off 1.7 percent to 52.2.

When asked if fourth quarter manufacturing output will be as solid as the third quarter, Holcomb said he expects it likely will be similar and cited that it is likely to match up with the growth projections from May’s ISM Semiannual report, which called for revenue expected to increase 5.3 percent this year (up from 4.4 percent in December), and capital expenditures pegged at 10.3 percent (up from 8.0 percent), and capacity utilization at 82.3 percent (up from 80.3 percent).

In a research note, Michael Montgomery, U.S. economist at IHS Global Insight, commented that the global readings on the manufacturing sector fall into three camps.

Activity is humming in North America, stalled in Europe and most of Asia, and dreary with minor declines in most of the rest of the world,” he wrote. “The US and Canada are a big market for goods, but final demand is not thriving in either, just doing acceptably well. That leaves inventories as the likely stimulus to the spurt and that is not a foundation for permanent strength; it’s just enough punch for a growth spurt.”

The mild September declines in the ISM report, he stated, may serve as a warning that that times as good as the summer months had little chance of continuing without booming sales.