Just when most of the business metrics in this country had turned more positive, and sentiment that the nation could well be falling into a recession had waned, has come word that the nation's manufacturing base has weakened slightly. No, we are not in a reversal in this key sector as yet. In fact, such activity expanded in October for the 27th straight month. However, the rate of growth slowed moderately from both the prior month and expectations. Even so, a look into the various components of the survey shows that there was some encouraging strength.
Specifically, the Institute for Supply Management, the Tempe, Arizona-based industry group, reported that economic activity in the manufacturing sector came in at 50.8 for October, down from a level of 51.6 in September. Expectations had been that this metric would improve to 52.0 last month. It should be noted that a reading above 50.0 signals that this key sector is expanding. Scores between 42.0 and 50.0 denote some contraction in the manufacturing base, but not a recession. Scores below 42.0 are consistent with a recession in the aggregate.
Worrisome, in addition to the overall slowing rate of improvement last month, was a slowdown in inventory accumulation, going from 52.0 to 46.7. Conversely, several components looked better. For example, new orders perked up last month, rising from September's 49.6 to 52.4 in October. Also, employment, always a concern, again grew nicely, easing from 53.8 to 53.5 in October. Also, prices fell sharply going from 56.0 to 41.0. On the bright side, that price weakness suggests that earlier worries about inflation might well be exaggerated. On the other hand, this plunge in prices could be a signal that demand will falter up ahead. Finally, backlogs, while again falling, declined less aggressively than in September, coming in at 47.5 last month, up from a recession-like 41.5 during the prior month.
As for observations by participants in the survey, in the chemicals area comments included those suggesting that there was some deflation in raw materials pricing, which we noted in the overall sharp drop in prices last month. Also, we saw comments that volume was essentially flat in electrical equipment and appliances, while others observed that business was still strong in the automotive field, but slowing in plastics.
On the whole, the survey was largely a neutral event, being somewhat better than the headline number, owing to the improvement in new orders, but certainly not the kind of event that would suggest the nation's industrial base was strengthening as we wind down 2011.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.