While not quite yet back to growth mode, October manufacturing output showed signs of positive momentum, according to the most recent edition of the Institute for Supply Management’s (ISM) Manufacturing Report on Business, which was issued today.
The report’s key metric, the PMI, eked out a 0.5% gain to 48.3 (a reading of 50 or higher indicates growth), following declines of 1.3% and 2.1%, respectively, in October and September. The October PMI marks the third consecutive month the PMI has come in below 50, while the overall economy grew in October for the 126th consecutive month. The October PMI is 4.4% below the 12-month average of 52.7. September’s 47.8 is the lowest reading during that span and is the lowest PMI reading going back to June 2009, when it came it at 46.3.
ISM reported that five of the 18 manufacturing sectors it tracks saw growth in October, including: Furniture & Related Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Wood Products; and Computer & Electronic Products. The 12 industries reporting contraction in October — in the following order — are: Primary Metals; Apparel, Leather & Allied Products; Textile Mills; Transportation Equipment; Plastics & Rubber Products; Machinery; Chemical Products; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Miscellaneous Manufacturing; and Paper Products.
Most of the report’s key metrics, including the PMI, saw gains in October.
New orders, which are commonly referred to as the engine that drives manufacturing, headed up 1.8% to 48.3, but contracted for the third straight month after growing for 43 consecutive months over which time it had a cumulative average of 58.5. ISM said that five of the 18 manufacturing sectors it tracks grew in October.
Production, at 46.2, slipped 1.1%, contracting for the third consecutive month after 35 consecutive months of growth. Six manufacturing sectors reported growth in October. Employment rose 1.4% to 47.7 while contracting for the third straight month. Supplier deliveries, at 49.4 (a reading above 50 indicates contraction) marked a 1.6% difference compared to October while showing growth and snapping a 43-month stretch of slowing supplier deliveries.
October inventories, at 48.9, increased 2%, following four months of declines, and customer inventories, at 47.8, were up 2.3% compared to September but were low for the 37th consecutive month. Backlog of orders, at 45.5, was off 4.2% and contracting for the sixth month in a row. New export orders, at 50.4, were up 9.4%, halting three months of declines.
As in past months, comments in the report submitted by ISM member respondents were consistent, with commentary on slowing business conditions and ongoing trade tension between the United States and China.
A computer and electronics respondent said that customer demand is down and he is expecting a very soft fourth quarter, without much relief in sight for the first quarter. And the respondent added that suppliers report the continued rise in labor costs, which are ultimately reflected in the rising product costs.
And a food, beverage, and tobacco products respondent observed that the economy is showing slight signs of weakening, noting that the same headwinds on trade, tariffs, and currency are making the environment challenging.
“I can clearly say that October was better than September,” said Tim Fiore, ISM Manufacturing Business Survey Committee Chair Tim Fiore, in an interview. “We slowed the contraction, and I feel fairly good about that, as it was driven by the new order number, which gives me a little more confidence in the future.”
And new orders in October clearly benefited from the significant gain in new export orders, which Fiore said is a positive, whereas, on a more negative note, he pointed to customer inventories still growing and is negative for the future, while the backlog of orders declined at a higher rate in October than September, while October overall was a better new order demand month than September.
Looking at some key manufacturing sectors, Fiore observed that transportation equipment is contracting heavily, more so than September, with the key difference being the GM strike, and the expectation that when an agreement is reached that situation will improve. Another transportation equipment headwind relates to the Boeing Max, with less optimism it is going to fly before year-end. And if it does not fly soon, Fiore said that there will be a fairly significant step down in sub-supplier output, with there likely already a step down at the Tier 2 or 3 level.
“Multiple tiers in the supply chain are not taking inventory in anticipation of this,” explained Fiore. “It is starting to weigh on things.”
When asked about the 2% gain in October inventories, Fiore said that while it is contracting it is in the same growth range as new orders, which indicates that supply chain people are doing a good job of matching inbound materials to inbound orders.
Looking ahead, Fiore said he expects the PMI to be in the 48-to-52 range between now and the next Presidential election in November 2020.
“The tariff issue got us here and eliminating tariffs will not get us out of here,” he said. “Nobody has that kind of confidence that if the China issue went away tomorrow, as well as all the other issues everywhere. If they all went away, there is no guarantee they would not return a month from now. Nobody will really invest until they know what 2021 looks like.”