September Manufacturing Index Surprises On Upside

Economists were expecting that the closely-watched monthly manufacturing index compiled by the Institute for Supply Management (ISM) would decline in September to 52%. It did not. Despite the damping impacts of high energy prices and damage from Hurricane Katrina, the manufacturing sector of the U.S. economy grew faster in September than in August. ISM's manufacturing index was 59.4% last month, nearly six percentage points higher than August's 53.6%, ISM reported on October 3. An index figure above 50% indicates that the manufacturing generally is growing; a figure below 50% signals contraction.

"While energy prices and the impact from Hurricane Katrina are major concerns, the manufacturing sector has regained significant momentum," says Norbert J. Ore, chair of ISM's manufacturing business survey committee.

New orders, production, employment, order backlogs and exports all grew faster in September than they did in August.

Significantly, prices that manufacturers paid for materials also increased -- a dramatic 15.5 points in September -- and that is worrisome because it could increase inflationary pressures within the economy and make the Federal Open Market Committee less likely to halt the series of quarter-point interest rate increases that began in June of last year.

There's another reason for some caution: The full impact of the Gulf Coast hurricanes may not yet be showing up in ISM's data. "More time is needed . . . to judge whether the September survey fully reflects the impact of production stoppages that occurred in Texas, Louisiana and Mississippi as part of a national picture," says Daniel J. Meckstroth, chief economist at Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy research group.

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