ISM Manufacturing PMI Fell in October but Suggests Continued Expansion

The Manufacturing Purchasing Managers Index from the Institute for Supply Management registered a 57.7 percent reading in October, down from 59.8 in September. Despite the pullback, the index remains well above neutral, a positive sign for the manufacturing sector. October is the 26th month in a row above the neutral 50 level and the 114th above the 43.2 percent threshold consistent with expansion in the overall economy. While demand, production, and employment remain strong, supply chain constraints and rising input costs are becoming major issues for manufacturers.

Among the key components of the Purchasing Managers Index, the New Orders Index came in at 57.4 percent, down from 61.8 in September. October was the 34th consecutive month with readings above 50 and the first with a reading below 60 since April 2017.

The production index was at 59.9 percent in October, down from 63.9 in September. October marks the 26th month in a row above 50. Historically, readings above 51.5 are consistent with growth in the industrial-production index from the Fed. In October, 13 of the 16 industries surveyed reported growth while 3 reported a decrease in production.

The employment index fell to 56.8 percent in October, up from 58.8 in September. Despite the slightly lower reading, the result suggests employment in manufacturing likely increased for the 15th consecutive month in October. The Bureau of Labor Statistics’ Employment Situation report for October is due out on Friday, November 2. Consensus expectations are for 190,000 new nonfarm-payroll jobs including 15,000 new jobs in manufacturing. Payroll processor ADP’s estimate for private sector jobs came in at 227,000. Combined, all indications are that the October jobs report is likely to be positive, suggesting continued strength in the labor market.

Supplier deliveries, a measure of delivery times from suppliers to manufacturers, came in at 63.8, up from 61.1 in September. October was the 25th consecutive month above 50, and the results suggest suppliers delivering to manufacturers are falling behind at an accelerating pace (see chart).

The prices index rose 4.7 percentage points to 71.6 in October from 66.9 in September. However, the index has been trending higher since early 2016 and has been above 50 for 32 months and above 60 for 16 consecutive months (see chart). These results suggest manufacturers are experiencing materials-costs pressures. Some inputs may be pressured by both strong demand and higher tariffs.

Customer inventories in October are still considered too low, with the index rising to 43.3 from 40.5 in the prior month (index results below 50 indicate customers’ inventories are too low). Among manufacturers’ customers, only two industries reported excessive inventories: nonmetallic mineral products; and electrical equipment, appliances, and components.

Today’s report from the Institute for Supply Management suggests the manufacturing sector continued to grow in October. Despite pullbacks in the latest month, solidly positive readings for new orders, production, and employment suggest a positive outlook for manufacturing. Those results are in line with other recent data that point to ongoing expansion for the overall economy. However, high index readings for input prices and supplier deliveries represent evidence of the strength and duration of the current expansion, but also create challenges for manufacturers.

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Robert Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.