Rapid Recovery in Manufacturing Activity Ahead of the Election

Manufacturing activity in the United States saw an increase in activity in October. The Institute for Supply Management released its ISM Manufacturing Index, and the reading rose to 59.3 from 55.4 in September. Econoday had a consensus estimate of just 55.7, and Dow Jones had its consensus at 56.0 for the month.

What is interesting about this report, on top of the unexpected gain, was that this resumed the path of beating expectations after September had been deemed a slight disappointment.

The latest reading also was said to be the highest since September 2018, and there was very solid news for the Federal Reserve’s goals of higher prices and moving back toward full employment.

ISM’s report indicated that demand, consumption and inputs all showed growth that was indicative of a normal expansion cycle. Some industry sectors were still seen as experiencing difficulties that are expected to continue in the near term, but ISM’s stance is that the manufacturing community overall has continued to beat expectations. Of the six largest manufacturing industries, five of them posted strong growth:

  • Fabricated Metal Products
  • Food, Beverage & Tobacco
  • Chemicals
  • Computers & Electronics
  • Transportation Equipment

According to the ISM report, respondents reported that their companies and suppliers continue to operate in reconfigured factories and that each month they are becoming more proficient at expanding their output. Sentiment also was considered to be more optimistic with two positive comments for every cautious comment.

The order book backlogs expanded at a slightly faster rate than in the three prior months, while consumption in the production and employment components made positive contributions. Also noted was that customers’ inventories showed the lowest figure since June 2010 at just 35.8%, which is deemed to be a positive indicator for future production as businesses will need to bolster those inventories.

Perhaps the best news came from the jobs side of the report. The ISM reported that its Employment Index went up into expansion territory for the first time since July of 2019. As for inflation, the overall pricing trends continued to expand and are reflecting a continued shift to pricing power at the seller level.

The following is a breakdown of October’s percentages, with a comparison to September:

  • New Orders Index 67.9 percent, an increase of 7.7 percentage points.
  • Production Index 63.0 percent, an increase of 2 percentage points.
  • Backlog of Orders Index 55.7 percent, 0.5 percentage point higher.
  • Employment Index 53.2 percent, an increase of 3.6 percentage points.
  • Supplier Deliveries Index 60.5 percent, up 1.5 percentage points.
  • Inventories Index 51.9 percent; an increase of 4.8 percentage points.
  • Prices Index 65.5 percent, an increase of 2.7 percentage points.
  • New Export Orders Index 55.7 percent; an increase of 1.4 percentage points.
  • Imports Index 58.1 percent, an increase of 4.1-percentage points.

Monday’s ISM report is one of the last broad economic measurements that will be seen ahead of Tuesday’s election. The report was surprisingly strong, considering the mixed reports that had been seen in prior weeks.

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