In November, the Institute for Supply Management’s manufacturing index slipped to 53.6 from 55.7 in October. While disappointing, the index remains above 50, which indicates that the manufacturing side of the economy is still expanding. It is also the second-highest reading for this recovery, and far above the 2.9 it hit last December.
However, the slippage was widespread. There are ten component sub-indexes that go into the overall reading, and eight of them declined. On the other hand, eight are also still above the 50 mark. The lowest readings continue to come from the inventory side.
The gauge of companies on inventories plunged to 41.3 from 46.9 in October, while the survey respondents’ view of their customers’ inventories fell to 37.0 from 38.5. A slower pace of inventory draw-downs was a major factor in GDP growth during the third quarter. These numbers cast doubt on whether this can continue in the fourth quarter. However, inventories represent very low-quality growth — growth that tends to be reversed in subsequent quarters. Every other sub-index is above the mark.
In a positive sign looking forward, the strongest sub-component — as well as the one showing the most improvement — was new orders, with a reading of 60.3, up 1.8 points from October. A total of 13 industries reported improvement in new orders, while only four recorded declines. The production sub-index also had a strong absolute reading of 59.9, but it showed a 3.4-point decline from last month. Eleven industries reported increasing production, and only three reported lower production.
While still above 50, the employment component is just barely, at 50.8 — down 2.3 points from October. The vast majority of respondents reported no change in employment levels. In the November survey, 17% of respondents reported higher payrolls and 18% reported lower. In October, 20 had reported expansion and 16% reported contraction. Given the current unemployment rate of 10.2% and with manufacturing being particularly hard-hit, the decline in this sub-index is particularly disheartening.
Overall, it appears that the industries that are showing the most distress from this report are wood products and furniture. Transportation equipment was also repeatedly listed on the weak side. This is particularly true of the key new orders and production components. This indicates that firms like Boeing (BA) and Paccar (PCAR) still face weak business conditions.
The electrical equipment industry, on the other hand, was consistently listed on the positive side in the report. This might be a good omen for firms like Emcor (EME) and Emerson Electric (EMR).
Overall, this report is more evidence of a slow-but-steady recovery for the economy.
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