October Manufacturing Activity: Still Growing, Still Slowing

November 1, 2006 – The ISM diffusion index of U.S. manufacturing activity fell by 1.7 index points to 51.2 in October, reaching its lowest level since June 2003 (Chart 1).

Chart 1. ISM manufacturing activity index. January 1987 through October 2006.

This index has fallen by a net 6.1 index points over the last six months. Despite these recent declines, it continued to signal growth in the manufacturing sector through October.

Within the survey detail, the ISM new order index fell by 2.1 index points to 52.1 in October, indicating slower new order growth. At the same time, the order backlog index fell by 2 index points to 44.5 in October, signaling a second straight month of steep declines in order backlogs.

Against this backdrop of softening orders, the ISM production index fell by 4.2 index points to 51.9 in October, suggesting a fairly sharp falloff in the pace of October production growth (Chart 2).

Chart 2. ISM manufacturing production and new order indices. January 1987 through October 2006.

However, in some “particularly good news”, these data also suggest that manufacturers finally received some relief from rising input costs in October. The ISM input price index plunged 14 index points to 47 in October, indicating a decline in input prices that month (Chart 3). Before October, this index had been signaling exceptionally strong growth in manufacturers’ input prices for 14 straight months.

Chart 3. ISM manufacturing input price index. January 1987 through October 2006.

The ISM employment index rose by 1.4 index points to 50.8 in October, indicating a small October improvement in manufacturers’ labor demand (Chart 4). According to the ISM, a sustained employment index level in excess of 48.9 has been historically consistent with a positive trend in manufacturing payroll employment (coming Friday).

Chart 4. The ISM manufacturing employment index versus the change in manufacturing payroll employment. January 2000 to date.

Suzanne Rizzo