September 2010 ISM Reports: Manufacturing Stumbles; Services Speed Up

The Institute for Supply Management’s (ISM) reports on the manufacturing and service sectors provide a more up-to-date view of conditions than either the Federal Reserve Board’s report on industrial production and capacity utilization or the U.S. Census Bureau’s report on manufacturers’ shipments, inventories and orders.

Click image for larger version

With a 1.9 percentage point decrease in its PMI, manufacturing expanded at a noticeably slower pace in September. "While the headline number shows relative strength this month as the PMI reading of 54.4 percent is still quite positive, the overall picture is less encouraging,” said Norbert Ore, chair of ISM’s Manufacturing Business Survey Committee. “The growth of new orders continued to slow, as the index is down significantly from its cyclical high of 65.9 percent (January 2010). Production is currently growing at a faster rate than new orders, but it typically lags and would be expected to weaken further in the fourth quarter. Manufacturing has enjoyed a stronger recovery than other sectors of the economy, but it appears that weaker growth is the expectation for the fourth quarter. Both the Inventories and Backlog of Orders Indexes are sending strong negative signals of weakening performance in the sector."

ISM’s manufacturing report points to "an economy that is growing but not growing very rapidly," said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. "We may see a cooling off in manufacturing in the next few months."

After exhibiting no changes for two months, Wood Products reported some movement in September; unfortunately, most of those changes were disappointing. Paper manufacturing, on the other hand, lengthened its string of positive changes.
 

Click image for larger version

Growth in the service sector picked up speed in September, nearly offsetting the PMI decline; the non-manufacturing index rose by 1.7 percentage points (to 53.2 percent). None of the service industries we track showed much change. One Construction respondent indicated that the "general state of the business has not changed in the last three months. The market is still soft for new sales due to financing requirements."

"This is slow and steady growth," remarked Anthony Nieves, chair of ISM's non-manufacturing survey. "There's still this cautiousness about whether or not things are turning the corner but people want to remain optimistic."

Input prices paid by manufacturing industries jumped at a significantly faster pace (9 percentage points), but the rate of increase slowed slightly (-0.2 percentage point) for the service sector. Relevant commodities whose prices increased in August included: corrugated containers, diesel fuel and paper. No relevant cmmodities were down in price. Coated groundwood and coated freesheet were commodities listed in short supply.