New Orders Lead ISM Manufacturing Index Higher

A key nationwide survey of manufacturing conditions jumped past expectations to hit its highest level since June 2007, marking the first sign of growth in 19 months.

The Institute for Supply Management’s survey climbed to 52.9 in August, against expectations for a score of just 50.5. A massive jump in New Orders was the key contributor as it soared to 64.9 in August, up almost 10 points from the impressive 55.3 level in July. That’s the highest level in the new orders index since late 2004.

Also adding a large portion of gains was the Prices Index which registered 65% in August, 10 percentage points higher than the 55% reported in July. This is the second consecutive month that the Prices Index has registered above 50 percent. While 38 percent of respondents reported paying higher prices and 8 percent reported paying lower prices, 54 percent of supply executives reported paying the same prices as in July.

“The year-and-a-half decline in manufacturing output has come to an end,” said Norbert J. Ore in the ISM press release. He pointed out that 11 of the 18 sectors surveyed were reporting growth. “We have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in the growth.” 

Looking ahead, Ore was optimistic that manufacturing would continue in recovery mode. “The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to re-stock to meet this new demand.”

Elsewhere in the report, Production jumped 4 points to 61.9, led by a 5-point gain in exports, an indication that the economic recovery isn’t just local.

Those awaiting Friday’s Employment Situation report will be happy to hear the jobs component ticked up nearly one point to a 12-month high, but at 46.4 the index suggests the jobs market continues to deteriorate.

Analysts at RDQ said the depletion of inventories should help the economy recover at a more rapid pace than previously thought. “With a balance of 22 percent of customers seen as having below-desired inventory levels, it appears that the manufacturing recovery may be more robust over the next year than we have been projecting,” they said.

Here are some comments from survey respondents:

•  “Production is picking up as demand [for] orders is being accelerated.” (Nonmetallic Mineral Products)
•  “Demand from automotive manufacturers increasing thanks to 'Cash for Clunkers.'” (Fabricated Metal Products)
•  “In addition to improved business come the complications of a supply chain drained of inventory.” (Paper Products)
• “The sudden increase in customer demand, plus the low inventories held at services centers, is causing a shortage in the supply of raw steel.” (Transportation Equipment)
• “[It] appears customers' inventories are getting low, and they are cautiously placing orders.” (Apparel, Leather & Allied Products)

The nationwide report following a series of regional business reports that beat expectations this month, including key surveys from New York, Philadelphia, and the Midwest. 

Equities were in a slump before the release, but immediately after 10:00 stock markets jumped up on the data. A double-the-consensus 3.2% gain in pending home sales, released at the same, certainly didn’t hurt either.

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