The Institute for Supply Management index, a closely watched measure of U.S. manufacturing activity, decreased in September to 55.4 from 56 in the previous month and fell below market expectations of 56.5. While this marks the fifth month in a row that economic activity expanded for manufacturing, the growth was smaller than in August. Readings above 50 indicate expansion, and those below 50 indicate contraction.
ISM’s overall index was dragged down by decreased growth in new orders (with a subindex of 60.2 vs. 67.6 in August) and production, which declined by 2.3 points. The long-term labor market outlook improved, but remains a concern, given that employment contracted for the 14th consecutive month and that the index is still below 50 (49.6), which signals that employers were still shedding jobs, albeit at a much slower pace in September.
“Manufacturing performed well in the month with demand, consumption and inputs registering growth indicative of a normal expansion cycle,” ISM Manufacturing Business Survey Committee Chair Timothy Fiore said in a statement. “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.”
Institute for Supply Management index
Here is what a few of the respondents to ISM’s September survey said, according to the organization’s monthly report:
- “Still struggling with long lead times for components coming from China [contract manufacturers].” — a computer and electronic products company
- “Volume remains lower than one year ago but has steadily improved over the past two periods.” — a chemical products company
- “Overall business conditions are improving, but not at the rates we saw them decline.” — a fabricated metal products company
The measure of inventories at factories increased to 47.1, indicating stocks were decreasing at a slower pace. Customer inventories slipped to 37.9, indicating an even faster rate of decline that could translate into further production gains in coming months, as businesses look to replenish their inventories.
While coming in below forecasts, ISM’s overall manufacturing index is still at its third highest level since the fourth quarter of 2018. The sharp reversals following the April lows coincide with the broad-based reopening of the U.S. economy, but it appears that the initial pent-up demand caused by the shutdown is waning, and with it, the growth in recent months.
Looking ahead, all signs point to a continued rebound in the manufacturing sector, but again, the pace of acceleration seems to be slowing. The ISM and other surveys, including the RSM US Manufacturing Outlook Index, are consistent with further increases in orders and output over the next few months and, at the current rate of increase, we would expect output to reach pre-pandemic levels sometime in the first quarter next year.