U.S. Manufacturing Index Unexpectedly Jumps to 56.9 in October

Paraphrasing writer Mark Twain, the reports of the U.S. manufacturing sector's death are greatly exaggerated. The nation's factory sector unexpectedly expanded at a faster pace in October, as the Institute for Supply Management manufacturing index jumped to 56.9 from 54.4 in September.

It was a broad-based gain, as three of four key components -- new orders, production, and employment -- rose.

October's ISM report marked the 15th consecutive month manufacturing activity expanded, and the highest index level since May.

Readings above 50 indicate an expansion; under 50, a contraction. Analysts surveyed by Bloomberg had expected the manufacturing index to rise to 54.5 in October from a revised 54.4 in September. The index was at 56.3 in August, 55.5 in July, and 56.2 in June. Readings above 50 indicate an expansion; under 50, a contraction.

Three Key Components Rise

In October, the closely-watched new orders component, a measure of future demand, surged almost eight points to 58.9 from 51.1 in September. In addition, the production component jumped 6.2 points to 62.7 from 56.5, and the employment component rose to 57.7 from 56.5.

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Meanwhile, the inventories component fell to 53.9 in October from 55.6 in September, but that could be interpreted as a sign manufacturers could not restock warehouses fast enough.

Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee, said the expansion in nation's factory sector had slowed through mid-year, but October's data may point to a re-acceleration in the nation's industrial operations.

"The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month's report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter," Ore said, in a statement. "Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy."

Respondents' comments in the October survey confirmed an ongoing expansion.

* "Our customer base -- auto manufacturers -- is expanding capacity and making major capital investments." (fabricated metal products sector)

* "Customers remain cautious, placing orders at the last minute, making supply planning a challenge." (machinery sector)

* "Business slowing down but still double digit [increase] over last yea.r" (chemical products sector)

* "The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins." (transportation equipment sector)

More Manufacturing Jobs Ahead?

October's ISM manufacturing index increase not only confirmed that the industrial recovery is not dead, it suggests a re-acceleration. However, investors should not read too much into the report, as it represents just one month's data -- not nearly long enough to conclude that a trend has formed.

That said, October's manufacturing report holds out hope for a revival of industrial sales, most likely boosted by solid international demandand aided by a weaker dollar. If the industrial acceleration continues, it will not only help lower the U.S. trade deficit, but will also increase U.S. GDP, and boost hiring by factories -- new jobs the U.S. economy really needs.