United States: ISM manufacturing index soars in September, in part due to post-hurricane activity
October 2, 2017
The Institute for Supply Management (ISM) manufacturing index outdid market expectations for a second consecutive month, reaching a 13-year high of 60.8 in September. The reading followed August’s 58.8 print and contrasted market expectations of a small decline to 58.0. Although all components except inventories posted gains in September, part of the strength observed in the headline figure was due to material disruptions to supply chains caused by the recent hurricanes. The index now sits further above the threshold of 50 that separates expansion from contraction in the U.S. manufacturing economy, which signals a solid pace of growth in the sector.
The strength observed in the sector was broad-based. New orders growth accelerated markedly by 4.3 percentage points to 64.6, while the expansion in output reached 62.2 from 61.0 in the previous month. This continued to add pressure to firms’ manufacturing capacity, which caused employment growth to accelerate as companies sought to increase their staffing levels to meet increased demand. However, backlogs of work continued to mount through the month, and at a quicker pace than in August.
Other increases in subcomponents were due to the impact of Hurricanes Harvey and Irma. Suppliers’ delivery times increased notably in September as many industries reported supply chain disruptions in the affected areas. In addition, scarcity of raw materials caused input prices to soar during the month, rising 9.5 percentage points to 71.5 in September.
The surge in prices and delivery times will likely be reverted in upcoming months as affected manufacturers come back online and supply chains are reestablished. This is expected to weigh on the ISM index as the corresponding components ease from the current levels, but it does not alter the picture of robust growth in the U.S. manufacturing sector. In addition, reconstruction efforts are likely to support manufacturing activity in the next few months, while the increase in input inflation could carry through to consumer prices, which would pave the way for an interest rate hike in December.
Author: David Ampudia, Economist