Supply index picks up, but recovery likely slow

An October index from the Institute for Supply Management indicates the manufacturing sector expanded at its fastest pace since spring.

ISM’s manufacturing index was 56.9 in October, up from 54.4 in September, with any reading higher than 50 signaling growth.

October was the 15th consecutive month showing manufacturing growth.

While last month’s index reading could be an indication that full recovery for the industry is on the way, it’s important to remember that recovery is likely to be a long, gradual process, said John Mather, a partner with BKD LLP’s St. Louis office.

“Manufacturers are starting to build inventories a little bit, with the thought that the market is coming back, and that consumers are starting to purchase again,” said Mather, who is a regional industry leader for Springfield-based BKD’s national manufacturing and distribution group.

While ISM’s manufacturing inventory index fell 1.7 percentage points to 53.9 percent in October, 27 percent of manufacturers said their inventories were higher, 52 percent reported no change, and only 21 percent reported less inventory.

“We are seeing signs that in the manufacturing sector, things are starting to slowly and gradually pick up,” Mather added.

ISM’s index tracks performance of 18 manufacturing sectors, and 14 of those – including apparel, machinery, fabricated metal, and food, beverage and tobacco products – posted growth in the October reading.

According to the U.S. Bureau of Labor Statistics, October’s Consumer Price Index for the Midwest held steady at 208.7 in October.

First published in 1966, the index measures the average change in prices over time for goods and services such as food, clothing, shelter and fuels.

The national index for October was 218.7.

“We do think the prospects of manufacturers increasing activity and consumers starting to purchase more is on the upswing, but it’s going to be a gradual ascent,” Mather added. “It’s not going to be something that we see in the next quarter be a significant impact.”

Among the ongoing concerns for the manufacturing sector is the change in congressional dynamics brought by the Nov. 2 election, Mather said.  

“Congress is continuing to work on what the tax structure is going to be for year’s end, or whether they’ll make any retroactive changes to taxes or move forward with changes,” he added. “That uncertainty still has business owners questioning what they’re really going to do in the near future. People are still somewhat reluctant to jump in (and) start reacting to what the indexes are telling them, until they’re certain as to what changes Congress will pass, primarily related to tax incentives and tax programs.”

He expects that once those decisions are made, however, the manufacturing sector would see continuing progress.

“There are a lot of companies right now that have right-sized their operations (and) made their operations very lean,” Mather said. “They’ve cut discretionary spending (and) have managed their businesses well so that their profitability has returned to similar levels that they may have seen two years ago. But there’s been a lot of cuts involved, whether it be number of employees, incentive programs, bonuses … to manage earnings.”

Still, he reiterated that it could be a long while before manufacturing bounces back to pre-recession conditions.

As manufacturers see their earnings improve, they are starting to build cash, Mather said, but they’re taking a wait-and-see attitude as to how that money will be spent as they wait for consumer spending to improve.

“Consumers are very cautious right now,” he added.[[In-content Ad]]