The manufacturing sector in September expanded for the first time in 10 months on the heels of the strongest production growth since last summer, the Institute for Supply Management reported on Monday.
We believe the sector has passed its bottom and is on an upward trend, given the tailwinds of higher fiscal outlays and improvements in supply chains.
The risk to that outlook, however, is if the United Auto Workers strike should it last longer than expected. The spillover effect of an extended strike would possibly erase all those recent gains.
The sector’s overall index rose to 49% in September from 47.6% earlier, while the production subindex rose to 52.5% from 50%. Anything above 48.7% indicates an expansion for the overall index, and above 50% for all other subindexes.
The survey data was in line with the recent increases in manufacturing production reported by the Federal Reserve in July and August.
While the new orders subindex continued to decline, the monthly drop was the smallest since last summer. Employment, on the other hand, posted the first increase in four months, another sign that a recovery is in the pipeline.
Read more of RSM’s insights on manufacturing and the middle market.
The manufacturing sector, together with the housing sector, was one of the first economic casualties of the Fed’s aggressive rate hike campaign to tame inflation. But the sector has already absorbed the brunt of the rate hikes, which adds another reason to believe that the rebound will continue.
The inventory subindex continued to contract in September, although at a lower rate. Prices paid also dropped, but at a faster rate, providing the Fed with some needed relief as inflation picks up.
The takeaway
With the chance of a soft landing to the economy increasing, we should expect the manufacturing sector to lead the overall recovery as interest rates peak and the prospect of rate cuts grows.
It is time for manufacturing companies, especially in the middle market, to switch from a defensive stance of being well-prepared for a recession to a more offensive mode to capitalize on the economic tailwinds in the next six to 12 months.
