The Institute for Supply Management (ISM) said that the purchasing managers’ index (PMI) moved slightly higher, up from 56.2 in September to 56.4 in October. This continues the pickup in activity seen in the manufacturing sector since May, when the PMI was contracting somewhat at 49.0. This means that manufacturers have observed expanding levels of activity for five consecutive months. October’s PMI reading was the fastest pace since April 2011.
The big story in this report was the strength of sales, with the index of new orders up from 60.5 to 60.6 for the month. This marks the third straight month with the sales index exceeding 60.0, indicating an extremely healthy pace of new orders. Moreover, while export growth eased somewhat in September, it accelerated again in October. The Export orders index has shifted from 55.2 to 52.0 to 57.0 over the past three months (August to October, respectively). This export sales figure was the highest level since April 2012.
There were some modest pullbacks in production (down from 62.6 to 60.8) and employment (down from 55.4 to 53.2). Output growth continues to be quite robust, even with the slight easing in October, as the index for production has exceeded 60.0 for three straight months, much as we see in the new orders data. On the employment front, however, it suggests that hiring growth continues to be quite modest at best, with manufacturers still hesitant to add too many workers.
Interestingly, the data do not indicate a large impact from the government shutdown, even as other surveys have suggested that it has zapped confidence. To the extent that there was any negative impact, it appears to be a small one. The sample comments that were provided tended to echo this. With that said, a fabricated metal products manufacturer hinted that the budget impasse had taken a bit of a toll on sentiment, with the shutdown and threat of a budget default “causing all kinds of concerns in our markets.” Moreover, a transportation equipment maker added a comment the negative impact of sequestration on their firm, saying, “Government spending continues to be slow in defense and military.”
Overall, manufacturers continue to be mostly upbeat in their outlook, with relatively strong growth in sales and output recorded for three straight months. “New business is booming,” said one respondent. This is obviously good news for the sector, particularly given the weaknesses that manufacturers have witnessed over the past year in production, exports, and hiring. Hopefully, this cautious optimism is warranted, with growth continuing to move in the right direction.
It is notable that economic growth remains below its potential, with growth in the second half of 2013 of less than two percent. At the same time, ongoing budget negotiations and other government uncertainties put some downward risks to growth as we move into 2014. More than anything, policymakers need to consider pro-growth measures that will keep the manufacturing sector flourishing and build on the current momentum seen in this ISM report.
Chad Moutray is the chief economist, National Association of Manufacturers.