US manufacturing PMI hits 55.5 as production and inventories drive the rise

October's manufacturing PMI reached 55.5. Reconstructing its five components shows that production and inventories accounted for the full gain. New Orders barely moved, and the Prices Index eased as fewer manufacturers reported price increases.

The Institute for Supply Management's October Manufacturing PMI rose 1.0 point to 55.5, the tenth straight month of expansion. The gain came from stronger Production and Inventories readings, which mean more respondents reported increases in output and stocks. New Orders did not strengthen comparably.

ISM's headline is the average of five subindexes: New Orders, Production, Employment, Supplier Deliveries and Inventories. On CTOL's arithmetic, dividing each subindex's change by five reproduces the move.

The average goes from 54.46 in September to 55.48 in October, a rise of 1.02 points that rounds to the published 1.0.

What supplied the gain

Inventories added the most to the PMI, 0.56 points. They rose 2.8 points to 51.4, back into expansion from 48.6.

Production rose 2.3 points to 59.0, its highest since the 60.5 of November 2021, and added 0.46.

Together, they account for the full 1.02-point increase. The other three subindexes cancel out.

New Orders gained 0.2 points to 55.5, Supplier Deliveries gained 0.1 to 59.1, and Employment fell 0.3 to 52.4. Their contributions are 0.04, 0.02 and negative 0.06, which sum to zero.

Where orders fall short

At 55.5, New Orders still signals expansion for the tenth month in a row, following four straight contractions. It is weak only in relative terms. The PMI's 55.5 is below July's 55.6, while New Orders remains below its July reading of 56.7.

The Employment subindex slipped to 52.4 from 52.7, and only 8 of 18 industries reported hiring growth. ISM's hiring-to-reducing comment ratio was 1.8 to 1. ISM rates hiring as growing, at a slower rate than in September.

Other order readings also weakened. The Backlog of Orders slipped to 54.6 from 56.4. One Transportation Equipment respondent told ISM that customers are in wait and see mode and that the usual fourth quarter bump "does not exist" this year.

Why production breadth exceeds order breadth

In New Orders, 24.2 percent of respondents reported higher orders and 16.9 percent lower.

In Production, 27.6 percent reported higher output and 11.5 percent lower. That shows broader reported production increases, not that aggregate output grew faster than incoming orders.

The survey cannot say why. Manufacturers' Inventories returned to expansion at 51.4, but the reading does not show what drove the stock increases.

Supplier Deliveries stayed elevated at 59.1. A higher reading means slower delivery and counts as a plus in the PMI. But the component added only 0.02 points, so it cannot explain the gap between Production and New Orders.

Why prices eased

The Prices Index fell 2.7 points to 75.2 from 77.9 because price increases became less widespread, rather than because more firms reported cuts.

The share of respondents reporting higher prices dropped to 53.1 percent from 58.6 percent.

The share reporting no change rose to 44.1 percent from 38.6 percent, and the share reporting lower prices held at 2.8 percent.

That makes the index a count of how widespread increases are, not an inflation rate. At 75.2 it remains 4.1 points above the 71.1 of July and August.

Raw material prices have now risen for 25 straight months. ISM says steel and aluminium, tariffs and petroleum products linked to the Middle East conflict are still driving the reading.

ISM says a Prices Index above 52.8 percent is generally consistent with a rise in the BLS Producer Price Index for Intermediate Materials. At 75.2, the reading sits well above that line.

Conditions are uneven

Twelve of 18 industries grew and three contracted, and five of the six largest expanded. Yet the share of manufacturing GDP in contraction rose to 6 percent from 2 percent, all of it in strong contraction.

A Machinery respondent said business is strong, driven by data centres and municipal water systems. Across industries, ISM's comments turned more negative for a third month, at 66 percent negative against 34 percent positive.

Pricing volatility featured in 62 percent of the negative comments. One Food, Beverage and Tobacco respondent said diesel rates and the trucker shortage are pushing costs beyond raw materials to levels "I have never seen".

Steel, copper, resins, semiconductors and memory components are among the commodities up in price, and electronic and electrical components are among those in short supply.

What it means for the Fed

The Federal Reserve held its target range at 3.75 to 4.00 percent on 28 October, after a quarter point increase on 16 September. The statement said activity was "expanding at a strong pace" and inflation "remains elevated".

The Prices Index remains elevated at 75.2, which shows widespread input-cost increases even as their breadth narrowed. That is a relevant inflation signal ahead of the Fed's December meeting. But ISM's diffusion indexes cannot establish the size of price rises or predict the decision. The Fed meets again on 8 and 9 December with new projections.

CTOL's view and the number to track

CTOL reads October as confirming expansion, with little increase in how widely firms reported order growth. New Orders rose just 0.2 points and contributed 0.04 of the 1.02-point PMI gain. That calculation cannot show whether order volumes accelerated.

Separately, the Prices Index fell as fewer firms reported rising costs, though it remained at 75.2. Less widespread price increases do not independently establish a change in demand.

Watch New Orders in the November report, due in early December. A reading above 56.7, July's level and the highest of the last four months, would show broader order growth than in October.

It would not show whether orders contributed more to the November PMI change than Production and Inventories. A reading at or below it would not prove weak demand, because the index does not measure order volumes.