By Anna Louie Sussman
WASHINGTON -- A gauge of U.S. factory activity rose in October, a sign the manufacturing sector could be stabilizing after two years of challenging conditions.
The Institute for Supply Management on Tuesday said its purchasing manufacturers' index rose to 51.9 in October from 51.5 in September. A reading above 50 indicates that factory activity is growing, while a reading under 50 signals contraction.
Details of the report were mixed. The index for new orders dropped, but those for production and employment both rose. Bradley Holcomb, who oversees the ISM survey, said the employment index was due for a correction after several months of contraction, and the rise signaled manufacturers were confident new orders would increase over the next few months. He noted comments from survey participants about future business conditions were generally positive, which he chalked up to improving conditions in the global economy and the imminent conclusion of the U.S. presidential election.
Stephen Stanley, chief economist at Amherst Pierpont Securities, said the index was at a level "consistent with modest growth, which is probably about the best we can expect from manufacturing."
He added the jump in the employment index "underscores the sense that a tight labor market trumps...election uncertainty in firms' calculus on whether to pull the trigger on a new hire when a good candidate arises." The overall economy has been adding jobs even as businesses have been reluctant to invest in equipment.
A separate measure of manufacturing-sector activity from private data provider Markit showed its manufacturing purchasing managers index rebounded in October to 53.4, its highest level in a year, with strength in new orders and output. That follows a reading of 51.5 in September.
"The latest data were not especially strong, but suggest that the manufacturing sector is starting to pick up some momentum following a weak run through most of the year so far," said Daniel Silver, an economist with J.P. Morgan Chase & Co.
"We think that the sector is due for some improvement as some of the earlier drags that impacted the sector fade."
The manufacturing sector has been hit by several factors, including low commodity prices, a strong U.S. dollar and weak growth in overseas markets. U.S. companies have also been slow to invest in new equipment and structures, especially in the energy industry, although oil prices have stabilized in recent months. The petroleum and coal products industry was one of the 10 manufacturing industries reporting growth in the October ISM report, out of a total of 18.
The tumble in the price of oil is still rippling through other parts of the manufacturing sector, extending to other sectors such as transport and residential construction. American Railcars Industries, Inc. interim chief financial officer Luke Williams told analysts earlier this month that falling demand for the tank railcars used to ship oil around North America by train had pushed operating margins for the third quarter into negative territory, and revenues were down from the same quarter a year ago.
The trend could reverse in the fourth quarter, said the ISM's Mr. Holcomb. Firms that have had a strong year will feel more comfortable tapping into their capital expenditures budget before the year is out.
"They'll open up the purse strings, if you will," Mr. Holcomb said. Although the machinery industry reported contraction in October, he advised keeping an eye on how it moves in coming months.
But companies heavily reliant on the commodity sector are still not fully in the clear. Mike DeWalt, vice president of finance services at Caterpillar, Inc., said construction in China had been "generally positive this year," but declining demand for construction equipment in North America helped lower the firm's overall outlook.
Looking ahead, he said improved commodity prices are still not "quite good enough to drive substantial sales increases next year. We would like to see commodity prices rise more next year," he said.
Other measures of the U.S. manufacturing sector suggest it is slowly recuperating. Manufacturing output rose 0.2% in September, the Federal Reserve said last month. American consumers upped their spending on durable goods by 1.3% in September, in contrast to the general hesitation of firms to invest in capital equipment, the Commerce Department said in late October. New orders for durable goods fell slightly in September, but excludingthe volatile categories of defense and transportation goods, actually posted a gain for the month, according to the Commerce Department.
Write to Anna Louie Sussman at firstname.lastname@example.org
(END) Dow Jones Newswires
November 01, 2016 12:30 ET (16:30 GMT)
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