October ISM Index

Updated 19-Nov-09 19:26 ET

Highlights

The ISM index reported a faster rate of expansion than expected in October as the index increased from 52.6 to 55.7. The consensus expected the ISM index to increase to only 53.0.
The rate of production rose as the index increased from 55.7 to 63.3 and backlogs maintained the same rate of expansion as last month.
Surprisingly, prices posted its fourth consecutive month of expansion as the index increased from 63.5 to 65.0.
Inventories continued to contract as manufacturing inventories increased 4.4 points to 46.9 while customer inventories declined 0.5 to 38.5.

The data from the sub-indices were interesting in the fact that new orders expansion slowed from 60.8 to 58.5 while employment showed its first sign of expansion in 14 months.
One would expect orders would have to continue to strengthen in order to drive demand for new labor. The jump in employment may be temporary as firms bring back some furloughed employees to maintain a new production schedule through the end of December. If consumer demand does not continue to rebound beyond then, manufacturers could return to smaller workforces.
If production continues to increase without a significant boost to new orders, backlogs will begin rapidly falling over the next few months.
Given the heightened unemployment level and slack in the manufacturing capacity, theory suggests prices should be facing more deflationary pressures than inflationary.

This is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.

Category	OCT	SEP	AUG	JUL	JUN
Total Index	55.7	52.6	52.9%	48.9%	44.8%
Orders	58.5	60.8	64.9%	55.3%	49.2%
Production	63.3	55.7	61.9%	57.9%	52.5%
Employment	53.1	46.2	46.4%	45.6%	40.7%
Deliveries	56.9	58.0	57.1%	52.0%	50.6%
Inventories	46.9	42.5	34.4%	33.5%	30.8%
Export Orders	55.5	55.0	55.5%	50.5%	49.5%
Prices paid (not seas adj)	65.0	63.5	65.0%	55.0%	50.0%