lean, inventoryU.S. manufacturers are entering the fourth quarter of 2016 on a generally positive note as factory activity expanded for the second consecutive month in October. The nation’s leading manufacturing index, the PMI, increased by 0.4 percent in October to 51.9, according to the Institute for Supply Management. A 3.2 percent uptick in employment –- to 52.9 — further indicates that manufacturers are anticipating growth.
“We actually beat expectations for October, which we had in the 51.7 percent area,” said Brad Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. Any number above 50 indicates expansion in manufacturing. “We also like that production is up, deliveries are tight and supplier deliveries are slowing.” An executive from the computer and electronics segment of the market reported a “favorable outlook” for 2016 while miscellaneous manufacturing called for “ongoing strength in 2016 — it’s a good year.”
The ISM’s production index registered 54.6 percent in October, 1.8 percentage points higher than the September level. New orders slowed a bit – by 3 percent – to reach 52.1 percent. Inventories of raw materials registered 47.5 percent, a decrease of 2 percentage points from the September reading of 49.5 percent.
“We are seeing a continuation of lean inventory management,” said Holcomb, “which remains fine at 47.5 percent. Backlog is contracting faster, which means production has been strong.” Backlog reached 45.5 percent in October, a decrease of 4 percent from the prior month. “There have been no plant shutdowns; production is going at a nominally strong rate; so, it means manufacturers are eating into their backlog. That’s what backlog is for—it’s a buffer to keep production level,” Holcomb said.
U.S. businesses are also well-positioned in the global market, based on October’s report. New export orders saw a slight uptick —by 0.5 percent—to 52.5 percent. “I like the continuation of new export orders, which has reached its high in 8 consecutive months of growth,” said Holcomb. “It means the price of the dollar [in foreign markets] is not problematic; and imports are back in the ‘growing’ category as well.”
U.S. businesses do not expect to suffer any disruption because of the Hanjin Shipping Company bankruptcy, ISM found. Although Hanjin is a massive player in ocean transportation, less than 1 percent – 0.8 percent—of U.S. manufacturers surveyed expect a large material impact on their business. Most companies – 51.9 percent—expect no impact and 29.7 percent expect a small but not material impact. The 13 percent of respondents that expect a material impact also said the disruption would be “manageable.” “These companies clearly have a workaround strategy, whether it’s air or land transportation or some other alternative,” Holcomb said.
The October report represents a pattern throughout the year of “rather slow growth, and yet it’s starting to feel a little more consistent,” concluded Holcomb. “Overall, it’s a nice, respectable and balanced report.”