October US ISM Report Documents Slight Backlog Improvement, Lower Production Levels, and Larger Share of Manufacturing Industries in Strong Contraction

According to the latest US ISM Manufacturing PMI Report, economic activity in the US manufacturing sector contracted in October for the eighth consecutive month. The Manufacturing PMI registered 48.7 percent in October, a 0.4-percentage-point decrease compared to the reading of 49.1 percent recorded in September. Concerns and uncertainty regarding the ongoing impact of tariffs on supply chains and cost structures continued to dominate respondents’ comments.

All four demand indicators (New Orders, New Export Orders, Backlog of Orders, and Customers’ Inventories indexes) improved, although all remain in contraction territory. The New Orders Index of 49.4 percent is 0.5 percentage points higher than the 48.9 percent recorded in September. The New Export Orders Index reading of 44.5 percent is 1.5 percentage points higher than the reading of 43 percent registered in September. The Backlog of Orders Index registered 47.9 percent, up 1.7 percentage points compared to the 46.2 percent recorded in September. The Customers’ Inventories Index contracted at a slower rate. A “too low” status for the Customers’ Inventories Index is usually considered positive for future production.

Regarding output, production deteriorated and employment contracted at a slower pace. The October reading of the Production Index (48.2 percent) is 2.8 percentage points lower than September’s figure of 51 percent. The Employment Index registered 46 percent, up 0.7 percent from September’s figure of 45.3 percent, with two-thirds of panelists indicating that managing headcount is still the norm at their companies as opposed to hiring.

Inputs (defined as supplier deliveries, inventories, prices, and imports) were mixed. The Supplier Deliveries Index of 54.2 percent is up 1.6 percentage points from the 52.6 percent recorded in September. (Supplier Deliveries is the only ISM PMI Reports index that is inversed; a reading above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases.) The Inventories Index registered 45.8 percent, down 1.9 percentage points compared to September’s reading of 47.7 percent. The Prices Index remained in expansion territory, registering 58 percent, down 3.9 percentage points compared to the reading of 61.9 percent reported in September, indicating pricing increases but at a slower rate. The Imports Index contracted at a slower pace, registering 45.4 percent, or 0.7 percent higher than September’s reading of 44.7 percent.

According to ISM, a chain reaction of one-month index improvements started with New Orders in August and flowed to Production in September. In October, it manifested in a 1.7-percentage-point increase in the Backlog of Orders Index. ISM believes these short gains have not appeared to translate into sustained growth for the sector, reflecting continuing economic uncertainty.

Fifty-eight percent of the manufacturing sector’s gross domestic product (GDP) contracted in October, down from 67 percent in September; however, the share of GDP in strong contraction (registering a composite PMI of 45 percent or lower) is at 41 percent, up 13 percent from September. Of the six largest manufacturing industries, only two (Food, Beverage & Tobacco Products and Transportation Equipment) expanded in October.

The six manufacturing industries reporting growth in October—listed in order—are: Primary Metals; Food, Beverage & Tobacco Products; Transportation Equipment; Plastics & Rubber Products; Fabricated Metal Products; and Nonmetallic Mineral Products.
The 12 industries reporting contraction in October—in the following order—are: Textile Mills; Apparel, Leather & Allied Products; Furniture & Related Products; Paper Products; Printing & Related Support Activities; Wood Products; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Chemical Products; Machinery; Miscellaneous Manufacturing; and Computer & Electronic Products.

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