Manufacturing activity continued to improve in September helped by a depreciated U.S dollar and a stronger global economy. The Purchasers Manger’s Index posted a score of 60.8, up 2.0 points month on month, (m/m) surpassing analysts’ expectations. The index is now at its highest level since July 2004. The new order sub index was 64.6, its fifth month in a row greater than 60 and its best showing since March 2011, as fourteen of 18 industries reported growth in new orders.
The ISM manufacturing index is based on surveys of 400 purchasing managers in 20 industries. The survey is a diffusion index calculated as a percent of responses. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary.
Figure 1 shows the history of the ISM manufacturing index from 2003 to present. The index is solidly in the expansion zone, where it has been for 13 consecutive months. On a 3 month moving average, (3MMA) basis the index posted a value 58.6, up 14.6%, 3 months year on year (y/y). When examined on a 12MMA, the index rose 11.6% y/y.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score of 60.8 was 3.7 points higher than its year to date average, one year ago the composite index was 50.0.
The inventory sub-index shot dropped 5.4% m/m to 52.5 in September. ISM reports that an inventory index greater than 42.9 points is consistent with expansion in the Bureau of Economic Analysis’ figures for overall manufacturing inventories.
The difference between new orders and inventories which is considered a proxy for future production was 12.1 in September compared to 4.8 last month. This points toward continued gains in factory production for the coming quarters. Order backlog improved modestly, up 0.5 point or 0.9% m/m to 58.0.
New export orders, (not seasonally adjusted) increased from 55.5 to 57.0 as new import orders fell 0.5 point to 54.0. The difference between new export and import orders imply that trade GDP will post a small positive in the third quarter.
The employment index moved-up 0.4 point to 60.3, an encouraging sign of prospects for continued growth in manufacturing employment. Near term employment will likely be negatively affected by the recent hurricanes, but analysts expect this to be temporary in nature.
The prices paid sub-index surged 9.5 points to 71.5 m/m. Commodities listed as being in short supply were: gasoline, capacitors and other electrical components, aluminum, copper, brass and freight.
Momentum (3 month y/y value minus the 12 month y/y value), was positive in all categories. The composite index momentum was +3.0%. Production posted momentum of +3.1%. New orders momentum came in at very encouraging +2.2%. The employment sub-index momentum recorded at sold gain of +5.3%. Import momentum rose 3.2% as export momentum fell 3.0%, (we consider this a positive). Inventory momentum was up a fraction, 0.3% and backlog momentum posted +4.1%.
September’s ISM manufacturing report was very optimistic with promise of continuing strong performance in the coming months and quarters.