The Institute for Supply Management’s (ISM) purchasing managers’ index (PMI) edged slightly higher, up from 55.7 in August to 56.2 in September. This was the fourth consecutive increase, illustrating improvements in the sector since the contraction observed in May. Moreover, September’s PMI was the fastest pace since April 2011.
The larger story is the progress acceleration in activity over the course of the past few months, with relatively strong growth in production and new orders. For instance, the index from production has bounced back from contracting in May (with a sub-50 reading of 48.6) to recording three months in a row of 60-plus readings. The production index increased from 62.4 in August to 62.6 in September. The sample comments tended to echo these sentiments, with many citing increasing demand for their goods.
Along those lines, the pace of new orders remained healthy despite a slight pullback from 63.2 to 60.5. Stronger sales activity should bode well for future output growth. One area of caution was in foreign markets. The exports index eased from 55.5 to 52.0, suggesting a moderation in the growth of sales overseas.
One of the weaker components of the PMI data has been hiring growth, with manufacturers continuing to be hesitant to add new workers. The employment index rose from 53.3 to 55.4, suggesting a pickup in hiring for the sector. This would be good news if true, particularly with manufacturers adding just 20,000 additional workers over the past year and several other reports, including the NAM/IndustryWeek Survey of Manufacturers, indicating only modest growth at best in terms of hiring.
Two other data points of note included inventories and prices. Stockpiles in general have been depleted over much of the past year or so, with negative inventories in five of the nine months so far in 2013. In September, inventory levels were unchanged, up from contractions in July and August. Meanwhile, pricing pressures have picked up a bit (up from 54.0 to 56.5), and yet, inflation remains mostly modest.
Overall, manufacturers wrapped up a pretty decent third quarter in terms of output and sales. That is definitely the case when compared to the softness experienced in the second quarter, when activity was essentially stalled. The average PMI reading for the last three months was 55.8, and more importantly, the average new orders reading was 60.7, indicating relatively strong growth in sales. As such, this data tends to mirror other reports that show an acceleration of activity of late for the sector.
Such data tend to support the notion of cautious optimism ahead, and yet, uncertainties in the marketplace could put a monkey wrench in such positivity. Fiscal uncertainty is likely to limit economic growth – at least in the short-term – and we continue to see growth rates for manufacturing that, while better than in the spring, are still not as robust as we might like. With that in mind, this manufacturing report suggests movement in the right direction, but policymakers would be wise to move beyond the short-term budget battles and begin debating ways to grow our economy for the long-term.
Chad Moutray is the chief economist, National Association of Manufacturers.
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