When 2016 started off poorly for the US manufacturing sector as a result of the pounding in the E&P sector, with rising concerns about a recessionary impulse among US manufacturing industries, the latest Markit manufacturing report for October has allayed much of the slowdown concerns with a headline print of 53.2, higher than the 51.5 expected, and up 1.7 points from September - the highest print since October of 2015.
Notably, the new orders index also rebounded to 54.7 from 51.1 previously, and also the highest in 12 months.
Manufacturing production has now increased for five months running, following a slight dip in May. Survey respondents cited an accelerated pace of new business growth and, in some cases, efforts to boost production in anticipation of stronger client demand in the months ahead.
According to the report, October data signalled that U.S. manufacturers started the fourth quarter in a strong fashion, with output and new order volumes rising at markedly faster rates than in September. A rebound in business conditions contributed to greater input buying among manufacturing firms and renewed pressures on capacity. At the same time, manufacturers sought to boost their stocks of inputs, with pre-production inventories rising for the first time since November 2015.
Manufacturers reported that supportive domestic economic conditions remained a key growth driver, helping to offset sluggish export sales in October. Survey respondents also noted that increased production and greater purchasing activity reflected hopes of a post-election upturn in client demand
Higher levels of incoming new work resulted in a greater degree of backlog accumulation across the manufacturing sector during October. The latest rise in unfinished work was the largest for 12 months.
However, while the rebound was broad based, the weakness within the employment subcomponent remains, and declined modestly in October relative to the previous month. Some firms commented on increased capacity pressures at their plants, in part reflecting subdued job hiring in recent months. Latest data signalled only a moderate rise in payroll numbers, and the rate of expansion was weaker than in September.
The latest survey indicated a robust upturn in input buying among manufacturing firms, which was linked to projections of rising demand and associated efforts to boost inventories. Moreover, the increase in purchasing activity was the fastest since June 2015. This contributed to a rise in preproduction stocks for the first time in 11 months. At the same time, finished goods inventories stabilized in October, which ended a four-month period of decline.
Of note, for the first time in over a year, inflationary pressures were cited as a factor concerning the respondents:
"Manufacturers indicated that cost pressures intensified in October, with the latest increase in input prices the fastest for almost two years. Anecdotal evidence cited greater raw material prices and rising transportation costs. Meanwhile, factory gate charges increased for the first time in three months and the rate of inflation was the strongest since November 2014.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:
“Manufacturing showed further signs of pulling out of the malaise seen earlier in the year, starting the fourth quarter on a solid footing. Both output and new orders are rising at the fastest rates for a year amid increasingly widespread optimism that demand will pick up again after the presidential election, which has been commonly cited as a key factor that has subdued spending and investment in recent months.
“There are also signs that the drag from cost-cutting policies of deliberate inventory reduction is moving into reverse. Inventory-building should therefore provide an extra boost to the economy in the fourth quarter.
“Weak export growth, attributable to the strong dollar, and lacklustre hiring remain big areas of disappointment, and highlight an ongoing dependency on domestic demand and a need to keep labour costs low amid a still-uncertain economic and political outlook.”