* The Institute for Supply Management (ISM) manufacturing index rose to 56.2 in September 2013 from 55.7 in the previous month, and it was its highest level since April 2011. Market expectations had been for moderation in the measure to 55.0.
* The unexpected improvement in the ISM manufacturing index at the end of the third quarter of 2013 is encouraging because it indicates that factory activity is maintaining the upward trajectory established during the summer and providing a solid handoff to growth in the final calendar quarter of 2013. Moreover, the spread between the “new orders” and “inventory” components (considered a key indicator of future activity), while narrowing slightly in September, still remains elevated and suggests further increases in activity may be in the cards during the near term.
* US construction spending data for August, which were scheduled to be released this morning by the US Census Bureau, were not published due to the partial shutdown of the US government.
Activity in the US manufacturing sector expanded for the fourth consecutive month in September 2013, and the pace of growth unexpectedly accelerated as evidenced by the ISM manufacturing index rising to 56.2 in the month from the 55.7 reading recorded in August. The market had expected the measure to moderate to 55.0 in the month.
The increase in the headline ISM index in September reflected a fairly broad-based improvement among the main components, with four of the five sub-indices moving higher in the month. The gauge of current production edged up to 62.6 from 62.4 in August while “new orders” retraced half of the previous month’s jump to a 2.5-year high, which was down 2.7 points to a still solid reading of 60.5. The pace of hiring increased in September with the “employment” sub-index moving up to a 15-month high of 55.4 in from 53.3 in August. “Supplier delivery” rose to 52.6 from 52.3 in the previous month, thereby indicating that shipments from suppliers were slower than the previous month (delivery times tend to lengthen as suppliers face more capacity constraints). Rounding out the main components of the index, manufacturing inventories were steady following two consecutive monthly contractions as indicated by the “inventory change” sub-index coming in at the break-even 50.0 in September. With respect to inflation, the “prices paid” component rose to 56.5 from 54.0 in the previous month, thereby indicating that prices for raw materials increased at a faster pace in September.
The unexpected improvement in the ISM manufacturing index at the end of the third quarter of 2013 is encouraging because it indicates that factory activity is maintaining the upward trajectory established during the summer and providing a solid handoff to growth in the final calendar quarter of 2013. Moreover, the spread between the “new orders” and “inventory” components (considered a key indicator of future activity), while narrowing slightly in September, still remains elevated and suggests further increases in activity may be in the cards in the near term. With that said, the issue confronting the October 2013 ISM report will be the extent to which the turmoil in Washington regarding the setting of fiscal policy weighs on sentiment. The solid reading in the employment gauge is consistent with our expectation that the September non-farm payrolls report (which may or may not be released on Friday) will show that overall employment increased by 185,000 following the gain of 169,000 recorded in the previous month.
RBC