Domestic factory activity dipped to a six-month low in October as trade tensions, transportation shortages, and decreased demand dogged U.S. manufacturers.
The Institute for Supply Management’s PMI decreased 2.1 percentage points in October to 57.7, its lowest level since April. New orders decreased 4.4 percentage points to 61.8% t in October, which contributed a two-month decline of 7.7 points. That’s the steepest dip since January 2015.
Although any number above 50 indicates expansion, nearly all PMI sub-indexes declined from September. The ISM production index declined four percent to 59.9 percent. Employment also dropped – by two percent to 56.8 – largely due to the production slowdown. Supplier deliveries registered 63.8 percent, a 2.7-percentage point increase from September, while inventories registered 50.7%, a decrease of 2.6 percentage points.
“Overall demand was off by 4.4%, and that is a concern,” said Tim Fiore, chair of the ISM’s manufacturing business survey committee. Although the ISM strips seasonality out of the PMI, October’s data doesn’t bode well for the rest of Q4. “October is historically the best month of the year for manufacturing,” Fiore said. “With these numbers, I wouldn’t expect to see a robust recovery in November or December.”
Transportation difficulties continue to disrupt production, Fiore added. Delivery performance of suppliers to manufacturing organizations slowed in October, as the supplier deliveries index increased by 2.7% “This is the 25th straight month of slowing supplier deliveries and indicates supply chains’ difficulty in keeping up with production demand,” Fiore explained. “The index reversed an expansion softening from the prior month. Lead times continue to extend, supply chain labor issues continue to restrict performance, and transportation issues are continuing to limit supplier execution.”
October’s data could also indicate that the Trump Administration’s trade war with China is starting to inflict pain on U.S. manufacturing even as the industry expands. Export orders in October decreased 3.8 percent to 52.2, the lowest level since Nov. 2016. “The expansion of new export orders softened,” Fiore said, “but five of six major industries contributed, up from two in September.”
Tariffs remain a major concern for U.S. manufacturers. More than 40 percent of respondents to the ISM’s monthly survey cited trade as a headwind. Although more industries contributed to U.S. exports in October – five sectors, up from two – new export orders decreased by 3.8% points to 52.2.
“[There’s] mounting pressure due to pending tariffs,” said one manufacturing executive. “[We’re] bracing for delays in material from China — a rush of orders trying to race tariff implementation is flooding shipping and customs.”
“Steel tariffs continue to negatively affect our cost, even though we utilize U.S. sources for steel,” said an executive in the petroleum industry.
Companies that have multiple global factories are shifting production around, while other business continue to evaluate where to set up their manufacturing operations, Fiore said. Import tariffs and counter tariffs are contributing to the slowdown in manufacturing expansion.
A quarter of all ISM respondents also cited shortages as a significant problem. The electronics industry – one of the ISM’s largest market segments – continues to struggle with component allocation and long lead times. Although some component makers have seen softening demand, the industry’s two largest global distributors have told analysts they expect growth to continue.
“I would point out that 57.7% is still expansion,” Fiore concluded. “The PMI has bounced around at the top at fairly high levels, and this is the first significant softening in a while. What’s causing real concern is that demand has dropped off.”