ISM Manufacturing Index Returns to Growth

Catching analysts by surprise, U.S. manufacturing in September enjoyed a rebound as the Institute for Supply Management reported its PMI index of manufacturing registered 51.5, up 1.9% from the August figure of 49.6. The index had shown slight contraction in the sector for the past three months.

Catching analysts by surprise, U.S. manufacturing in September enjoyed a rebound as the Institute for Supply Management reported its PMI index of manufacturing registered 51.5, up 1.9% from the August figure of 49.6. The index had shown slight contraction in the sector for the past three months.

Among the key factors in the report:

  • New Orders Index registered 52.3%, an increase of 5.2 percentage points from August, indicating growth in new orders.
  • Production Index registered 49.5%, an increase of 2.3 percentage points and indicating contraction in production for the second time since May 2009.
  • Employment Index increased by 3.1 percentage points, registering 54.7%.
  • The Prices Index increased 4 percentage points from its August reading to 58%.

“Comments from the panel reflect a mix of optimism over new orders beginning to pick up, and continued concern over soft global business conditions and an unsettled political environment,” the institute’s Bradley Holcomb noted.

While calling the new index "surprisingly good," Martin Schwerdtfeger, senior economist for TD Economics, said we should "keep our optimism on a short leash because the pace of expansion is still very modest.  Moreover, export orders remained in contraction territory, albeit at a lower speed.  This coincides with the performance of PMIs in other leading advanced and developing economies.  For instance, the PMI indexes of the euro zone, Japan and China were all below 50 once again in September, although most of them have shown some improvement over the last month." 

Of the 18 manufacturing industries, 11 reported growth in September. Expanding sectors in order included Textile Mills; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Wood Products; Apparel, Leather & Allied Products; Paper Products; Petroleum & Coal Products; Primary Metals; Fabricated Metal Products; Furniture & Related Products; and Miscellaneous Manufacturing. The six industries reporting contraction in September, listed in order, are: Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Machinery; Chemical Products; and Computer & Electronic Products.

Holcomb stated, "The past relationship between the PMI and the overall economy indicates that the average PMI for January through September (52.1%) corresponds to a 3.2% increase in real gross domestic product (GDP). In addition, if the PMI for September (51.5%) is annualized, it corresponds to a 3% increase in real GDP annually."

The ISM report came after a week of regional manufacturing reports from the Federal Reserve showing a manufacturing slowdown. Last week, the Empire State Manufacturing Survey showed weaker activity in the New York manufacturing sector as both the general business conditions and the new orders indexes fell to their lowest level in two years. The Chicago Fed’s Midwest Manufacturing Index slipped 1.2% for August, with the auto sector recording a sharp 4.0% drop in production. Still, automotive output was up more than 21% from the previous year.

“This September ISM survey provides the first hint that the pronounced slowdown in U.S. manufacturing that set in after the first quarter of the year may be poised for a turnaround,” said Don Norman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “It remains the case, however, that the crisis in the Eurozone, slowing growth in China and fears of going over the ‘fiscal cliff’ could nip in the bud any turnaround. It will take continued improvement in the ISM index before we can have confidence that the tide has indeed turned. In the meantime, slow growth remains the most likely short-term outlook for U.S. manufacturing.”

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