Manufacturing expanded at fastest pace in three years in October, ISM reports

Notch another significant improvement in the nation's manufacturing sector: the Institute for Supply Management announced Monday that its manufacturing index rose to 55.7 percent in October from 52.6 percent in September – the indicator's highest reading since April 2006.

A Bloomberg survey had expected the index to total 53.0 percent in October; the index totaled 52.9 percent in August. It hit a low of 32.9 in December 2008. Readings above 50 indicate an expansion; under 50, a contraction.

Further, the employment component rose to 53.1 percent in October from 46.2 percent: that marks the first time in 14 months that manufacturing employment is adding to economic activity rather than subtracting from it.
"The jump in the index was driven by production and employment, with both registering significant gains," said Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee in a statement. "Production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers. Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode."

Also in October, the inventory index increased to 46.9 percent from 42.5 percent in September. The production index rose to 63.3 percent from 55.7 percent. On the downside, the new orders index, a measure of future demand, slumped to 58.5 from 60.8, but it nevertheless remained above the 50 level demarcating expansion/contraction.

In October, ISM survey respondents' comments appeared to indicate an uneven U.S. economic recovery, and included the following: "We are beginning to be affected greatly by lead-time increases on semiconductor components." (Computer & electronic products sector.) "Still a very difficult environment -- commodity increases threaten recovery and don't seem to correlate with any supply/demand fundamentals." (Food, beverage & tobacco products sector.) "Automotive demand still remains strong even after 'cash for clunkers.'" (Fabricated metal products sector.) "After several rather busy months, we are seeing the order intake for early next year soften." (Transportation equipment sector.)

Economic Analysis

Another encouraging, monthly performance by the U.S. manufacturing sector: The nation's industrial output continues to rebound after a roughly three-year contraction. Aside from the top-line ISM index rise, the two most important take-aways from the October ISM factory report are: 1) the unevenness of the recovery, as expressed by survey respondents; and 2) the employment component's rise above 50 -- the expansion level -- for the first time in 16 months. Regarding the latter, like the U.S. housing sector's recent stabilization, the October factory employment stat does not indicate robust hiring -- far from it -- but the fact that it is stabilizing will likely be interpreted by U.S. stock markets as a positive: i.e. manufacturing in 2010 probably will not be the major GDP contractor that it has been since 2006. One caution: The new orders index did decline in October, and that would represent a danger sign if it drops below 50 in the months ahead.
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