Manufacturing sector growth moderates in September; PMI at 55.4%

Economic activity in the manufacturing sector increased at a slower rate in September as the overall economy grew for the fifth consecutive month, according to the Institute for Supply Management (ISM).

ISM released Thursday (Oct. 1) the Manufacturing ISM Report on Business showing the Purchasing Managers’ Index (PMI) fell 0.6 percentage points to 55.4% in September, from August. The figure indicates the economy expanded, and a PMI above 50% indicates the manufacturing economy is expanding.

The new orders index fell 7.4 percentage points to 60.2% in September, from August. The production index fell 2.3 percentage points to 61%. The backlog of orders index rose 0.6 percentage points to 55.2%. The employment index rose 3.2 percentage points to 49.6%. The supplier deliveries index increased by 0.8 percentage points to 59%.

The inventories index rose 2.7 percentage points to 47.1%. The prices index increased by 3.3 percentage points to 62.8%. The new export orders index increased 1 percentage point to 54.3%. The imports index fell by 1.6 percentage points to 54%.

“After the coronavirus (COVID-19) pandemic brought manufacturing activity to historic lows, the sector continued its recovery in September,” said Timothy Fiore, chair for the ISM Manufacturing Business Survey Committee. “Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories and are becoming more proficient at maintaining output. Panel sentiment was optimistic, an improvement compared to August. Demand expanded, with the new orders index growing at strong levels, supported by the new export orders index expanding moderately, customers’ inventories index at its lowest figure since June 2010, a level considered a positive for future production, and the backlog of orders index expanding at a faster rate compared to the prior two months.”

Consumption, which is measured by the production and employment indexes, contributed to a combined 0.9-percentage point increase to the PMI as five of the top six industries continued to increase output. Employment has nearly expanded for the first time since July 2019. Inputs, which are expressed as supplier deliveries, inventories and imports, continued to indicate input-driven constraints to more production expansion but at slower rates in September than in August. Inventory levels fell again because of strong production output and supplier delivery issues. Overall, inputs rose and contributed positively to the PMI. Prices continued to rise at a higher rate, and this reflects a continued shift to seller pricing power, a positive for new-order growth.

“Among the six biggest manufacturing industries, food, beverage and tobacco products remains the best-performing sector, with fabricated metal products and chemical products growing strongly,” Fiore said. “Computer and electronic products and transportation equipment expanded moderately. Petroleum and coal products remained a headwind to PMI performance.

“Manufacturing performed well in the month with demand, consumption and inputs registering growth indicative of a normal expansion cycle,” he added. “While certain industry sectors are experiencing difficulties that will continue in the near term, the manufacturing community as a whole has learned to conduct business effectively and deal with the variables imposed by the COVID-19 pandemic.”

A respondent in the computer and electronic products sector said the business continued to experience long lead times for components coming from China contract manufacturers. A respondent in the transportation equipment sector said “business is booming, and the supply chain has been caught off guard. We are working closely with our suppliers to ensure supply and try to control costs. The resin industry, along with plastics, is driving cost increases and scarce availability.” A respondent in the petroleum and coal products sectors said the business has not started to recover.

In the machinery sector, a respondent said customer orders have risen for deliveries in the first half of 2021, and the outlook is positive. In the food, beverage and tobacco products sector, a business noted retail sales remain strong, but food service has fallen about 15%, from the same period last year. Its factories are struggling to keep employees at work as many have COVID-19 or are in quarantine because of close contact with someone who has COVID.

A respondent in the electrical equipment, appliances and components sector said “demand remains high, strong finish to 2020 projected, with an even stronger 2021 fiscal year. Prices have increased in certain categories but no major price increases of our own have been implemented yet. We are seeing an uptick in reshoring opportunities in the third quarter across various industries and products.”