October manufacturing output remains solid, reports ISM

October manufacturing output was in line with September, continuing a strong run of growth, according to data issued today by the Institute for Supply Management (ISM).

In its monthly Manufacturing Report on Business, ISM said that the report’s key metric, the PMI, was 60.8 (a reading of 50 or higher indicates growth), off 0.3% from September’s 61.1 reading. This represented the 17th consecutive month of growth, at a faster rate, coupled with October also representing the 17th consecutive month of growth for the overall economy. The September PMI is 0.3% above the PMI’s 12-month average, at 60.5, with March’s 64.7 being the high point and November 2020’s 57.7 being the low point.    

ISM reported that 16 of the 18 manufacturing sectors saw gains in October, including: Apparel, Leather & Allied Products; Furniture & Related Products; Textile Mills; Electrical Equipment, Appliances & Components; Machinery; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Computer & Electronic Products; Chemical Products; Fabricated Metal Products; Miscellaneous Manufacturing; Petroleum & Coal Products; Plastics & Rubber Products; Paper Products; Primary Metals; and Transportation Equipment. The two industries reporting declines were Wood Products and Nonmetallic Mineral Products.

ISM also pointed out that the six biggest manufacturing sectors— Food, Beverage & Tobacco Products; Computer & Electronic Products; Chemical Products; Fabricated Metal Products; Petroleum & Coal Products; and Transportation Equipment —saw moderate to strong growth.

The report’s key manufacturing metrics were mixed in October.

New orders, which are commonly referred to as the engine that drives manufacturing, fell 6.9%, to 59.8, growing, at a slower rate, for the 17th consecutive month, with the aforementioned six largest manufacturing sectors all growing. This reading snapped a stretch of 15 months, in which the reading topped 60.

Production—at 59.3—was 0.1% below September, growing, at a slower rate, for the 17th consecutive month, with the top six manufacturing sectors each growing at strong to moderate levels. ISM said that production output continues to be impacted by raw materials being a constraint to growth, with inventories continuing to expand, staffing levels still an obstacle and direct labor turnover and retirements also a factor.

Employment—at 52.0—was up 1.8% over September, growing, at a faster rate, for the second month in a row. ISM said that three of the top six manufacturing sectors—Computer & Electronic Products, Fabricated Metal Products, and Chemical Products—expanding, and it added that companies are still struggling to meet labor management plans.

Other notable metrics included:

• Supplier deliveries—at 75.6 (a reading above 50 indicates contraction)—slowed, at a faster rate, for the 68th consecutive month, following September’s 73.4, with the delivery performance of suppliers to manufacturing organizations again slower in October;
• Backlog of orders—at 63.6—was down 1.2% compared to September and growing, at a slower rate, for the 16th consecutive month;
• Inventories—at 57.0—were up 1.4%, growing, at a faster rate, for the third straight month, and customer inventories—at 31.7—were flat, trending too low, at the same rate, for the 61st consecutive month; and
• Prices are up 4.5%, to 85.7, increasing, at a faster rate, for the 17th consecutive month

Comments from ISM member respondents in the report reflected many of the ongoing manufacturing challenges that have been seen over the last several months, including supply chain issues, labor retention challenges, and rising costs, among others.

“Global supply chain issues continue. Getting anything from China is near impossible—extreme delays. Microchip and circuit breaker shortages continue and are expected to continue into 2022,” said a Computer & Electronic Products respondent.

An Electrical Equipment, Appliances & Components respondent noted that demand continues to be strong but is continuing to be held back by supply chain issues, in the form of logistics delays, and capacity and labor issues at suppliers.

Tim Fiore, Chair of the ISM’s Manufacturing Business Survey Committee said in an interview that the October data exceeded expectations and was in line with September, with the mix, in terms of readings for certain metrics, changing somewhat.

“Being down almost 7% for new orders could be viewed initially as alarming, but being almost at 60 is still really good,” he said. “Prices are rising yet again, with the last two months reversing a trend of easing prices. Supplier deliveries are again getting more difficult, reversing improvement that been seen through July and lead times back to record lengths. You can easily see why many [companies] are not placing their orders for Q2 and Q3 of next year. In the absence of any true collapse in demand, there is an adjustment in which the buying community and companies are finishing their business plans for 2022 and finalizing them. It is wait and see. Why place orders for delivery in May and June, at the highest prices they have ever seen, when they can wait a month and maybe see the prices come down a little bit?”

As for how things could play out between now and the end of 2021, Fiore said that that the current levels, for the report’s key metrics, could remain intact. That comes with the caveat that both production, which he said should have come in around 65, and employment, both disappointed in October.

For the latter, he explained that the current market has been impacted by people moving from job to job and basically chasing wages. As an example, he likened the current situation to a company needing two people, so they hire two people, which is followed by two other people leaving, calling a difficult thing to manage.

“As a result of that, I think we are going to see very slow employment growth until wages kind of stabilize,” he said. “In order for wages to stabilize, we first need to see transportation stabilize followed by demand stabilizing. Transportation is the worst it has ever been, not only for ocean bur roads, too. I don’t think that will resolve itself until the second half of next year.”