US: October ISM survey points to continued expansion – Nomura

The US ISM manufacturing index in October declined 2.1pp to 58.7 from 60.8 in September, mostly in line with expectations (Nomura: 59.0, Consensus: 59.5), but despite the decline, the current level remains high, according to analysts at Nomura.

Key Quotes

“Details of the report suggest continued strength. We think this elevated momentum is likely to continue in Q4, consistent with solid strength in new orders and shipments data.”

Much of October’s decline was driven by easing of inventories and supplier deliveries indices. The declines in these two indices accounted for 72% of the 2.1pp decline in the top-line index. The supplier deliveries index fell to 61.4 from 64.4, subtracting 0.6pp from the topline index. The moderation in this index points to some alleviation in delays in supplier deliveries caused by recent inclement weather. The contraction in inventories in October, which lowered the ISM index by 0.9pp, was likely a reflection of “the difficulty of the supply chain to deliver materials and services meeting production schedules,” according to the ISM survey committee chair, Timothy Fiore. This contraction does not change our outlook on inventory growth in Q4. As supply chains recover, the inventories index will likely rebound.  

The employment index fell slightly but remained elevated at 59.8. It is likely that payroll employment gains in the manufacturing sector would contribute solidly to the nonfarm employment change in October, scheduled for release on 3 November. We expect a full reversal of a decline in September nonfarm payrolls, caused by Hurricane Irma’s landfall and some residual impact from Hurricane Harvey.

The prices paid index fell 3.0pp to 68.5 from September. Upward pressure on input prices appears to have persisted, although sharp increases caused by the hurricanes appear to have subsided somewhat. Net exports orders remained elevated at 56.5, down slightly from 57.0 in September. Healthy net exports orders appear consistent with better foreign demand, despite a short-term slowdown in goods exports in recent months partly due to port shutdown in Houston. Also, the weaker US dollar has likely been favorable for manufacturers.