September manufacturing output slips but still remains on growth track

While seeing a slight decline compared to August, September manufacturing output remained on the right side of growth, according to the most recent edition of the Manufacturing Report on Business issued today by the Institute for Supply Management (ISM).

The report’s key metric, the PMI, was 50.9 (a reading of 50 or higher indicates growth), following back-to-back readings of 52.8 in July and August, growing, at a slower rate, for the 28th consecutive month, in line with overall economic growth also for the 28th consecutive month. This is the lowest PMI reading May 2020, when it came in at 43.5.

The September PMI is 5.3% below the 12-month average of 56.2, with October 2021’s 60.8 and September’s 50.9, marking the high and low readings for that period, respectively.
ISM reported that nine manufacturing sectors grew in September, including: Nonmetallic Mineral Products; Machinery; Plastics & Rubber Products; Miscellaneous Manufacturing; Apparel, Leather & Allied Products; Transportation Equipment; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Electrical Equipment, Appliances & Components. The seven industries seeing contraction in September compared to August, are: Furniture & Related Products; Textile Mills; Wood Products; Printing & Related Support Activities; Paper Products; Chemical Products; and Fabricated Metal Products.

The report’s key metrics were mixed in September, including:

• New orders, which are commonly referred to as the engine that drives manufacturing, down 4.2%, to 47.1, contracting after growth in August, which followed two months of contraction, with five manufacturing sectors reporting growth;
• Production, at 50.6, increased 0.2% compared to August, growing, at a faster rate, for the 28th consecutive month, with eight manufacturing sectors reporting growth;
• Employment, at 48.7, fell 5.5% compared to August, following a month of growth, which was preceded by a three-month stretch of contraction, with six manufacturing sectors reporting growth;
• Supplier Deliveries, at 52.4 (a reading above 50 indicates contraction), was 2.7% behind August, slowing, at a slower rate, for the 79th consecutive month, with 10 manufacturing sectors reporting slower September supplier deliveries;
• Backlog of orders, at 50.9, were down 2.1% compared to August, while growing, at a slower rate, for the 27th consecutive month;  
• Inventories, at 56.5, were up 2.4% compared to August, growing, at a faster rate, for the 14th consecutive month, with Customer Inventories, at 41.6, up 2.7% compared to August, moving “too low,” at a slower rate, for the 72nd consecutive month; and
• Prices, at 51.7, were off 0.8% compared to August, increasing, at a slower rate, for the 28th consecutive month

Comments submitted by the ISM member respondents highlighted various themes, including: inventory concerns; worries about reduced demand; and supply chain issues.

“Supply chain issues for all electronic components and custom build-to-print materials are in short supply due to capacity and skilled labor shortages,” said a Computer & Electronic Products respondent. “Energy cost continues to negatively impact freight cost.”

A chemical products shipper pointed to how concerns of global economic slowdown are growing, and his company is experiencing some customers pulling back orders.

“The U.S. manufacturing sector continues to expand, but at the lowest rate since the pandemic recovery began,” wrote Tim Fiore, Chair of the ISM’s Business Survey Committee, in the report. “Following four straight months of panelists’ companies reporting softening new orders rates, the September index reading reflects companies adjusting to potential future lower demand. Demand eased, with the New Orders Index returning to contraction, New Export Orders Index in contraction for a second consecutive month, Customers’ Inventories Index remaining at a low level but as close as it’s been to an ‘about right’ reading since early in the pandemic and Backlog of Orders Index approaching contraction. Consumption (measured by the Production and Employment indexes) declined during the period, with a combined negative 5.3-percentage point impact on the Manufacturing PMI calculation. The Employment Index returned to contraction after one month of expansion, and the Production Index increased by 0.2 percentage point, staying in growth territory, but at a modest level. Many Business Survey Committee panelists’ companies are now managing head counts through hiring freezes and attrition to lower levels, with medium- and long-term demand more uncertain. Inputs—defined as supplier deliveries, inventories, prices and imports—accommodated growth. The Supplier Deliveries Index reached an appropriate tension level, and the Inventories Index increased as panelists’ companies continued to manage the total supply chain inventory. The Prices Index decreased for a sixth straight month and is not far from contraction territory, and the Imports Index modestly grew.”

In a previous interview, Fiore said that looking ahead to the remainder of 2022, he expects the PMI to be in the 51-to-55 range.

“I don’t see any more than that,” he said. “Outside of a hurricane driving up the supplier delivery number, I don’t see it going over 55. I don’t think the employment number will go up much more than where it is at. If it stays in the current range, it will be good. We are hoping for the production number to come up into the 55 range again and new orders to be around 52 or 53. This is where we ought to be. It feels like we are gliding along. The supply and demand imbalance is being fixed.”