Friday’s ISM report shows Manufacturing Expansion Downshifting

By December 3, 2006Economy

Business is UpOn Friday, the Institute for Supply Management (ISM) released its report on manufacturing for the month of October. The report showed that the closely-watched PMI Index, which summarizes the state of manufacturing, fell to a three-year low of 51.2 from 52.9 in September (a reading over 50 indicates expansion).

As recently as the third quarter of 2006, the manufacturing recovery was growing at a healthy 4.2 percent, nearly twice as fast as overall GDP growth. So what’s behind the recent slowdown? Well, the continued downturn in the housing sector is continuing to hit some manufacturing sectors (like wood product and non-metallic mineral (products like cement) manufacturers very hard.

At the same time, rising interest rates appear to be beginning to depress business demand for investment products. At present, the prime rate is at its highest level since the economy entered recession back in 2001. And in today’s ISM report, both fabricated metal and machinery manufacturer respondents commented that business was softening.

At the same time, despite the healthy jump in October, consumer spending has been moderating since February. So, with housing in a slump and business investment and consumer spending moderating, domestic demand for manufactured products is slowing. As such, I think we should be ready to expect several quarters of sup-par growth in manufacturing going forward.

Thankfully, today’s cloudy report by the ISM had a silver lining. Export orders rose to a 9-month high in October, besting imports for the 2nd time in 3 months. According to the most recent report by the Commerce Department, goods exports have grown faster than imports in each of the first three quarters so far in 2006. With today’s report in hand, I expect this trend will continue in the 4th quarter. This is pretty remarkable. The last time that exports grew faster than imports over 4 consecutive quarters was in 1989!

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