Manufacturing Activity Picks Up in October: ISM

Production and new orders show growth but Europe, fiscal cliff worries are drag on U.S. manufacturing.

The October manufacturing report from the Institute for Supply Management showed the sector edging up to 51.7%, an increase of 0.2 percentage point from September's reading of 51.5%. Readings in the widely followed index over 50 indicate growth in manufacturing.

The ISM report showed both new orders and production increasing in October. New orders rose 1.9 percentage points to 54.2%, and production registered 52.4%, an increase of 2.9 percentage points.

However, the employment and prices indexes both weakened. The employment index fell 2.6 percentage points to 52.1% and the prices index was off 3 percentage points to 55%.

Comments from the purchasing managers polled “reflect continued concern over a fragile global economy and soft orders across several manufacturing sectors,” said Bradley J. Holcomb, chair of the ISM’s Manufacturing Business Survey Committee.

“The October ISM report provides some reassurance that manufacturing is growing again, albeit at a slow rate, and not slipping back into recession,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). “Manufacturing activity was very much front-loaded in 2012. Manufacturing production, as measured by the Federal Reserve, grew at a 10% annual rate in the first quarter, expanded at only a 1% annual rate in the second quarter, and fell at a 1% annual rate in the third quarter—signaling that manufacturing was effectively flat in the spring and summer. The ISM report supports MAPI’s forecast that fourth quarter manufacturing production will grow at a 2% annual rate. 

Of the 18 manufacturing industries in the ISM index, eight reported growth in October in the following order: petroleum & coal products; furniture & related products; apparel, leather & allied products; paper products; miscellaneous manufacturing; food, beverage & tobacco products; plastics & rubber products; and chemical products. The eight industries reporting contraction in October — listed in order — were: primary metals; wood products; machinery; fabricated metal products; transportation equipment; electrical equipment, appliances & components; computer & electronic products; and nonmetallic mineral products.

Manufacturing Outlook Should Improve

“The rebound in U.S. activity echoes the improvement in the Chinese PMI, with both gaining on domestic related strength. European PMIs, on the other hand, continued to pullback in October,” noted James Marple, senior economist for TD Economics. “The European recession continues to be a drag on manufacturing output, but the nascent improvement in the U.S. housing sector is providing some support to manufacturing activity. As Europe's recession fades and a modest recovery takes hold, the outlook for manufacturing should improve further - buoyed by both external and internal sources of demand.”

“The current pace of growth in manufacturing is modest and should be much stronger,” MAPI’s Meckstroth added. “There is pent-up demand for motor vehicles and housing and the capital stock of equipment and structures needs to be replenished. A potential capital spending boom is being held back by the uncertainty concerning the ‘fiscal cliff,’ the uncertainty about the severity of the recession in Europe, a lack of clarity on future business tax policy, and the lack of business confidence that policymakers can come up with a credible plan for federal deficit reduction.”

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