October ISM data trends down but manufacturing is still growing

Even with a mild sequential decline, manufacturing output in October remained strong, according to the monthly Manufacturing Report on Business, which was released by the Institute for Supply Management (ISM) today.

The report’s key metric, the PMI, fell 2.1% to 57.7 3 (a reading of 50 or higher indicates growth), with this index showing growth for the 26th consecutive month and the overall economy now having grown for 114 consecutive months. October marks the second straight sequential decline, since the PMI hit its most recent high of 61.3 in August, which is the highest reading over the last 14 months. Compared to the 12-month average of 59.2, the October PMI is 1.5% below the average.

ISM reported that 13 of the 18 manufacturing sectors reported growth in August, including: Textile Mills; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; Furniture & Related Products; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Printing & Related Support Activities; Chemical Products; and Paper Products. The four industries reporting contraction in October are: Wood Products; Primary Metals; Nonmetallic Mineral Products; and Fabricated Metal Products.

Along with the PMI, the report’s key metrics saw declines in October.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 4.4% to 57.4 while still growing for the 34th consecutive month, marking the second straight decrease with 11 of 18 manufacturing sectors reporting new orders growth in October. October also marks the first month new orders have dropped below 60 since April 2017’s 57.1 reading.

连续ction fell 4% to 59.9 while still growing for the 26th consecutive month. Tim Fiore, chair of the ISM’s Manufacturing Business Survey Committee, explained in the report that supply chain labor constraints related to lead-time expansions and transportation issues are still limiting full production potential.

就业下降2%至56.8,仍在增长the 25th consecutive month, with employment still supporting production growth. Inventories, at 50.7, dropped 2.6% while growing for the tenth consecutive month, albeit at a marginal level, according to the report, and struggling to keep pace with production and reflecting ongoing issues with supplier deliveries.

Supplier deliveries, at 63.8 (a reading above 50 indicates contraction) slowed at a faster rate, and have been “slowing” at a faster rate for 25 consecutive months. Fiore noted in the report that this indicates supply chains are having issues in keeping pace with production demand, adding that as lead times continue to extend, supply chain labor issues continue to restrict performance and transportation issues continue to limit supplier execution.

Comments submitted by ISM member respondents included in the report were largely bearish, with many citing concerns related to tariffs and trade, as well as supply chain issues, among other areas.

“关税导致通货膨胀:增加的成本exports, increased cost of freight and increased domestic costs from suppliers who import,” observed a chemical product respondent. A transportation equipment respondent said: “Demand is high, and the supply chains are stressed.” And a plastics & rubber products respondent said “NAFTA 2.0/USMCA does nothing to help our company, as it does not address Section 232 tariffs.”

In an interview, Fiore said that five of manufacturing’s six biggest sectors contributed to the expanding PMI number, but the lone one that did not expand was fabricated metal products, which he said is in the middle of the issues related to steel and aluminum tariffs, adding that new orders were also a drag.

“New orders fell below 60 for the first time in 18 months,” he said. “On top of that, customer inventories (up 2.8% to 43.3) grew slightly but not a lot and fortunately backlog of orders (up 0.1% to 55.8) remained constant. This is definitely not a good sign, even though new orders were at 57.4. We have always said when new orders are strong, everything else follows, but this is the first time they are below 60 in a while.”

In recent months, the PMI has been “bouncing across the top,” said Fiore, with the average ranging between roughly 58 and 61. The October reading likely puts things in a different range, he explained.

“The nice thing about the PMI is that each of its sub-indexes has a 20% impact on the PMI, so, for October, there was a fall-off in every area, but the only area being a wash is supplier deliveries, which was offset by inventories,” he said. “The decline was driven by drops in new orders and production and employment. Had suppliers have been able to deliver faster in October, the PMI would have dropped even more. The supplier deliveries number is probably a bit more volatile than the other four.”

The reason for that is it can be highly impacted by things like hurricanes, as was the case a year ago, when Hurricane Harvey hit Texas and shut down transportation throughout the middle of the country and subsequently led to a gain in the supplier deliveries number.

October pricing jumped 4.7% to 71.6, growing for the 32nd consecutive month.

“I suspect this growth rate is sending a false signal,” said Fiore. “Pricing plans for 2019 are being solidified right now, and I think pricing levels have been set within the supply market which is what I think showed up in the October number. Prices have been agreed upon for 2019, and they re going to be higher.”