ISM October manufacturing report is down from September but showing growth

Although the numbers are showing continued signs of leveling out, the main theme of the October edition of the Institute for Supply Management’s Manufacturing (ISM) Report on Business indicated that growth is still occurring.

In October, the ISM reported that the index it uses to measure the manufacturing sector—known as the PMI—was 50.8 percent, down 0.8 percent from September’s 51.6 and in line with the 50.6 and 50.8 readings from August and July, respectively. As reported by LM, the PMI was routinely topping 60 earlier in the year, but experts said it was not likely it would remain at that level for a long period. From January through April the cumulative PMI average was 61.0 percent for the best combined four-month stretch in this report in more than 20 years.

The ISM says that any reading 50 or higher is a sign of economic growth, and even with a flattening out of the PMI in the low 50s range in recent months, October represents the 27th straight month the manufacturing sector expanded and the 29th consecutive month that the overall economy showed growth.

“There are some interesting things going on when we look at these numbers,” said Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, in an interview. “The 50.8 PMI is down slightly but growth is still occurring and I continue to find that quite remarkable with all the things happening both domestically and internationally. We have held our ground and shown the resilience in this sector for 27 months.”

Looking at the report’s main indicators, New Orders were up 2.8 percent at 52.4, and Production was off 1.1 percent at 52.4. Employment was slightly down, falling 0.3 percent to 53.5.

New Orders, according to Holcomb, were one of the report’s most positive aspects, given that it had been at sub-50 levels for the three previous months.

“This is what really drives the bus; it is all about new orders at the end of the day,” he said. “That may be telling us something abut the fourth quarter and the holiday season, with people and companies willing to place orders in order to be prepared for a pretty good rest of the year, but we will see.”

And while Production was down in October, it is still showing growth and being pulled up by strength in New Orders, explained Holcomb. And with Employment flat, he said it shows companies are still willing to hire and replace positions. While this will not translate into a lot of jobs, he said it will at least add some jobs, which bodes well for employer confidence at least in the next few months, with companies showing some sort of willingness to hire.

On the inventory front with a 5.3 percent decline, Holcomb said this is the one thing holding PMI growth down to 50.8 in October, with the other key metrics north of 50.

“If inventories were where everybody had expected like last time, then the PMI would be in more positive territory,” he said. “But inventories being down is actually great news, because it shows that manufacturers are leaning out inventory and getting rid of extra stock and are well-prepared to take advantage of these better prices, which were down 15 points to 41 in October and declining for the first time in a long time. With inventories down, manufacturers can take advantage of these low prices ever more.”

The steep drop in prices is more than expected, with a drop of roughly half as much more in line with projections, said Holcomb. But prices for things like metals, chemicals, and raw materials are all dropping, which he said comes as a welcome surprise.

Looking ahead, Holcomb said he expects New Orders to be above 50 in the coming months, which will continue to drain off inventory levels.

“My hunch is that it will be between where it now is and 50 for the next few months,” he said.