Operating conditions in the U.S. manufacturing sector strengthened to the greatest degree for a year during October, underpinned by faster expansions in both production and new orders. With pressure on capacity, as highlighted by a sharper increase in backlogs of work, further jobs were created.
Meanwhile, emergent inflationary pressures were evident as both input and output prices rose at solid rates.
October’s headline Markit Final U.S. Manufacturing Purchasing Managers’ Index™ (PMITM) was slightly better than the earlier flash reading of 53.2, coming in at 53.4. That was a marked improvement on September’s 51.5 and the best reading recorded for a year. Operating conditions have continuously improved throughout the past seven years, with October’s PMI reading notable for being the highest recorded by the survey for 12 months.
Driving the PMI higher in the latest survey period was a strengthening in production, which was in turn supported by a marked upturn in new orders. In both cases, rates of growth indicated by respective sub-indices were at their strongest in a year, reportedly the result of firmer market demand and the development of new products.
Both of these factors encouraged inventory building during the month, with both finished goods stock and input inventories rising since September. Growth in raw material and semi-manufactured inventories was the best since October 2015 and was also underpinned by a marked rise in purchasing activity. Latest data showed that manufacturers responded to positive demand developments by buying inputs at a rate not seen since June 2015.
October’s survey implied that domestic demand was key in driving the expansion of new order books. Whilst there was an increase in new exports, reflective of improved client relationships and general market expansion, growth was modest and lagged those seen during the summer.
Rising production and new order requirements placed some pressure on capacity during October, with backlogs of work increasing to the greatest degree in three months. This development encouraged further hiring of staff, with the latest data showing a rise in employment for the fortieth month in a row. However, growth was modest and slightly down on September’s pace.
Amid reports of rising commodity prices, average input costs increased for the seventh month in a row. The rate of inflation was also the greatest recorded by the survey for two years, and encouraged companies to pass on these higher costs to clients in the form of increased output charges. The net result was a solid pace of charge inflation that was the strongest seen since November 2011.
The ISM (via Haver Analytics):
The ISM composite index of factory sector activity rose to 51.9 from an unrevised 51.5 in September. It was the seventh month this year when the index was above break-even.
Performance amongst the component series was uneven. Production rose moderately, and recovered two months of decline. The employment index increased above 50 for the first time since June. During the last ten years, there has been an 88% correlation between the index level and the m/m change in factory sector payrolls. The higher supplier delivery index suggested the slowest product delivery speeds since June. To the downside was the new orders index which gave up half of its September increase. Continued inventory decumulation was suggested by the index falling to the lowest level since May.
The separate prices paid figure strengthened to 54.5, up from 53.0 during the prior two months. It remained below, however, the May high of 63.5. Twenty-five percent (NSA) of respondents reported paying higher prices while 16 percent paid less.
Amongst the other ISM series, the export index improved slightly to 52.5 and remained up versus the February low of 46.5. The imports index increased to 52.0, the highest level in three months. The order backlog index reversed its September gain.