The trifecta of a strong dollar, low oil prices and concerns about China continued to dog the U.S. manufacturing market in October. The domestic industry’s leading index, the Institute for Supply Management’s PMI, moved uncomfortably close to 50 — the dividing line between growth and contraction. The PMI in October measured 50.1 percent, down from 50.2 percent in September.
Several sub-indexes, however, showed improvement, signaling U.S. manufacturing doldrums may be close to the end. New orders increased by 2.8 percent, to 52.9 percent from 50.1 percent in September. The production index registered 52.9 percent, 1.1 percentage points above the September reading of 51.8 percent. The data indicates that manufacturers are filling existing backlog, said Brad Holcomb, chair of the Institute for Supply Management (ISM) Manufacturing Business Survey Committee, and customers are optimistic regarding the fourth quarter.
Low oil and gas prices are good for consumers, but oil production is an end market for many electronics companies. “[The] energy market continues to struggle. Effects are beginning to bleed into other areas,” a manager in the computer and electronic products industry told the ISM. Managers in the electrical equipment, appliances and components market are faring better: “Sales demand [is] becoming more consistent. [We are] beginning to see slightly more capital spending by key customers,” one manager said.
Another reason for optimism, said Holcomb, was a draw down in raw materials inventory in October: manufacturers’ inventory declined by 2 percent to reach 46.5 from 48.5 in September. “That’s a result of production being up and smart, conservative management of inventories,” he said. “Manufacturers don’t want inventory to get too high. But that number—which is below 50—is dragging down the PMI more than usual. I think we are going to see it climb back up as we go deeper into Q4.”
One surprise in October was a 2.9 percent decline in the employment index, from 50.5 to 47.6. Employment had been growing until September, and Holcomb said it’s unlikely that pace would be sustained indefinitely. There are still segments of the market that are hiring: manufacturers in fabricated metals are having problems finding skilled workers. “We still need young machinists to replace those retiring” one manager said.
China continues to influence sentiment on Wall Street and in the broader manufacturing industry, but it shouldn’t, some experts suggest. Of all the products the U.S. exports, only 8 percent go to China, according to principal economist for Raymond James Scott Brown. Brown, who presented at the recent ECIA Executive Conference, said the China economy has more of an impact on countries that import raw materials from China. Although U.S. exports to China have doubled over the past 10 years, China’s economy should not have a significant direct impact on U.S. manufacturing. Yet, Holcomb said, the shadow of China looms large. “If you listen to many people you’d think that the sky is falling. It is not falling,” he said. “I think Q4 is set up to be pretty good.”