The Purchasers Manger’s Index posted a score of 58.8, falling 2.1 points month on month, (m/m), lower than analysts’ expectations. Despite the decline, the index remains at elevated levels leaving the expectation of further gains in manufacturing over the next several months. The new orders index fell back 1.2 points to 63.4, its fifth month in a row over 60. The ISM manufacturing index reflects both changes in manufacturing conditions and sentiment. Currently, business confidence is robust, the stock market is in record territory and a corporate tax cut is in the on the horizon. These conditions will likely propel the ISM index higher over the near term.
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 14 consecutive months. On a 3 month moving average, (3MMA) basis, the index posted a value 59.4, up 16.7%, 3 months year on year (y/y). When examined on a 12MMA y/y comparison, the index increased by 12.2% y/y.
Table 1 breaks down the detail of the composite index and sub-indexes. The composite index score of for October 57.8 was 0.5 points higher than its year to date average, one year ago the composite index was 51.9.
Momentum (3 month y/y value minus the 12 month y/y value), was positive in all categories. The composite index momentum was +4.5%. Production posted momentum of +3.4%. New orders momentum came in at very encouraging +6.2%. The employment sub-index momentum recorded at sold gain of +5.4%. Import momentum rose 2.4% as export momentum fell 3.4%, (we consider this a positive). Inventory momentum was up, 0.5% and backlog momentum posted +5.2%.
Breaking down the sub-indexes for the monthly numbers: Inventory, (not seasonally adjusted) sub-index dropped 5.4% m/m to 52.5 in October. ISM reports that the large drop in inventory indicates that the supply chain is having trouble meeting production schedules. ISM also notes 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 15.4 in October compared to 12.1 last month. This points toward continued gains in factory production for the coming months. Order backlog fell 3.0 points or 5.2% m/m to 55.0 which means the pipeline softened somewhat.
New export orders, (not seasonally adjusted) fell from 57.0 to 56.6 as new import orders were unchanged this month at 54.0. The difference between new export and import orders imply that trade GDP will post a small negative on growth in the third quarter.
The production sub-index was down 1.2 points to 61.0 which is still a very strong performance. When this index is greater than 51.4, it points to an increase in the Federal Reserve Board’s industrial production figures.
The employment index dipped 0.5 point to 59.8, still a strong number.
The prices paid sub-index was off 3.0 points to 68.5 m/m offsetting September’s rise. Commodities moving up in price include: aluminum, brass, chemicals and caustic soda. Steel scrap and hot rolled sheet were among the products that were down in price.
Fifteen industries reported growth in production during October while only one noted a decline.
October’s ISM manufacturing report was generally positive with the promise of continuing strong performance for manufacturing the coming months and quarters.
At Gerdau we closely monitor the ISM manufacturing index since it is an excellent barometer of the present strength as well as a window on the likely short-run future of US manufacturing.