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Manufacturing PMI Shows Expansion for Fifth Straight Month

by Dr. Malio West, CMA, PMP

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By Dr. West and Global Accounting  Team |  Nov 2, 2020 11:12 AM EST
 

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Monday morning, shortly after the opening bell, the Institute of Supply Management (ISM) reported that the purchasing managers' index (PMI) for October advanced 3.9 percentage points to 59.3%, much better than expectations for a move to 55.8% and marking the fifth straight month of expansion.

 

The PMI measures the economic environment within the manufacturing sector, and is a key economic metric, as manufacturing is responsible for roughly 12% of the U.S. economy.

 

To put the new number in perspective, from November 2019 through October 2020, the PMI reached a high of 59.3%, a low of 41.5%, and averaged 50.7%.

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Source: October 2020 Manufacturing ISM Report On Business

 

Any number above 50% represents expansion in the manufacturing economy, while any number below 50% indicates a contraction.

 

"The past relationship between the Manufacturing PMI and the overall economy indicates that the Manufacturing PMI for October (59.3 percent) corresponds to a 4.8-percent increase in real gross domestic product (GDP) on an annualized basis," said Timothy R. Fiore, Chair of the Institute for Supply Management Manufacturing Business Survey Committee, in the release.

 
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In addition to the headline reading, we have provided a breakdown of the trends below. Just as with the headline reading, an index reading above 50% indicates expansion, while anything below 50% indicates a contraction. Additionally, monthly fluctuations above or below the 50%-level threshold speak to the rate of change. For example, a move from 51% to 52% would indicate a faster rate of change, while a move from 48% to 49% would indicate a slow rate of contraction, and vice-versa.

 

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Source: October 2020 Manufacturing ISM Report On Business

 

"The manufacturing economy continued its recovery in October. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories; with every month, they are becoming more proficient at expanding output. Panel sentiment was optimistic (two positive comments for every cautious comment), a slight decrease compared to September."

 

Digging deeper, of the 18 manufacturing industries tracked by ISM, 15 reported growth in September, led by Apparel, Leather & Allied Products; Fabricated Metal Products; and Nonmetallic Mineral Products. On the other hand, the two industries reporting contraction in September were Textile Mills; and Printing & Related Support Activities.

 

Lastly, to help members use this report to better gauge their own investments, we include a few quotes from ISM survey respondents in the various manufacturing industries (pulled directly from the ISM report):

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  • "COVID-19 continues to have an effect on supplier support and operations, more from a decreased labor perspective rather than unavailable material." (Computer & Electronic Products)
  • "Business continues to be robust. Sales are greater than expectations, and cost pressures are modest. There is posturing by suppliers on market price increases for corrugated and polypropylene, yet no firm price increases at this time. We expect a strong finish to 2020 and a solid start in 2021." (Chemical Products)
  • "Sales continue to be strong - up 4 percent this September compared to September 2019. The year-to-date level is still 21 percent below last year due to the [COVID-19] shutdown, but sales are stronger than expected and forecast to stay strong through the first quarter of 2021." (Transportation Equipment)
  • "Increased production due to stores stocking up for the second wave of COVID-19." (Food, Beverage & Tobacco Products)
  • "Continue to see increases in customer demand. We still are not back to pre-COVID-19 levels but are continually improving." (Fabricated Metal Products)
  • "Construction materials have leveled off but continue to be at an all-time high. Mills for board sheet stock have pushed out lead times citing increasing backlogs related to the pandemic and increased supply in the housing market." (Furniture & Related Products)
  • "Business is almost back to normal levels; however, customers are still cautious with capital spending." (Machinery)
  • "Business levels have just about returned to pre-COVID-19 levels. Our company is remaining conservative with fixed-cost spending, knowing the uncertainties that lie ahead with COVID-19 and its potential impact globally." (Miscellaneous Manufacturing)
  • "October order books are the strongest we have seen in the past six months." (Paper Products)
  • "We continue to see stronger month-over-month orders in plastic injection molding." (Plastics & Rubber Products)

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Dr. Malio West, CMA, PMP

Dr. West is a US Navy Veteran that served during Desert Shield/Desert Storm in Kuwait City. After the US Navy, Dr. West spent time in Singapore, Tokyo, Auckland, and Hong Kong working in international accounting focused on the financial services industry, at an executive level.

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