Manufacturing activity picked up in September with the ISM index notching its highest reading this cycle. Some of the gain can be traced to the effects of recent storms, but details suggest more fundamental strength.
Longer Delivery Times Support New Cycle High for the ISM
The ISM manufacturing index backed up a solid report in August with another standout reading in September. The composite index rose to a cycle high of 60.8. The gain in part looks to reflect some of the fallout of Hurricanes Harvey and Irma, but the breadth of strength suggests factory activity remains solid.
Among the composite’s sub-indices, supplier deliveries posted the largest gain, jumping 7.3 points to 64.4. Disruptions from the Gulf area storms have caused delivery times to lengthen. The bottle necks have extended beyond the chemicals industry, with respondents from the paper products and food, beverage & tobacco industries also reporting storm-related supply issues.
That said, supplier deliveries have been lengthening over the year, consistent with improving manufacturing activity. The production index notched its fourth consecutive month of above-60 readings, rising to 62.2. Moreover, the new orders index improved to 64.6 and suggests strength is set to continue over at least the next couple of months.
Manufacturers have been adding to inventories to meet growing demand. The inventory index came in at 52.5, closely in line with its average for the quarter. As we have been noting, inventories look set to provide a sizeable boost to third quarter GDP. Although much of the "hard" data on inventories has yet to come available, the ISM signals the strongest quarter of inventory building at the nation’s factories in more than two years. Moreover, the buildup appears intentional, as customer inventories were reported as too low for a third consecutive month.
One area where hurricane effects were clear was in prices. The prices paid index jumped to 71.5 in September with multiple respondents specifically citing higher input costs due to the recent storms.
Factory Hiring Remains Solid
Hiring in the manufacturing sector has been solid this year as the industry has shaken off last year’s commodity slump, the dollar has weakened and global growth has strengthened. Manufacturing payrolls have risen by an average of 17,100 jobs per month.
The ISM employment index points to continued strength for September. The hiring index edged up from an already elevated reading to 60.3. The solid pace of hiring in recent months suggests that longer supplier delivery times are not solely due to temporary weather disruptions. We look for the factory sector to add to payroll growth in Friday’s employment report, but note that hiring disruptions due to the recent hurricanes generate the potential for readings that may not be indicative of the underlying trend in factory hiring.
