Look – I’m hardly the world’s biggest fan of the monthly private sector national manufacturing surveys that purport to reveal the state of American industry. I’ve reported on their consistent failure to track the actual performance of domestic manufacturers compared with the results of the official (and much more comprehensive) data, and explained that a main reason is that the surveys suffer from “survivorship bias.”
Still, since they’re both so widely followed, it’s crucial to note that both the October report released by the Institute for Supply Management this morning, and its counterpart from Markit.com, show that the sector is doing just fine. More specifically, since these results track well with the latest government figures on manufacturing, they represent even more evidence that claims of tariff-induced manufacturing devastation are Fake News.
The headline number for the October ISM (57.7) was indeed lower than its September edition (59.8). It’s also lower than the average for the last twelve months (59.2). But it’s not much lower. Even more important – any reading above 50 signals expansion. And although the comments from various industries contained were full of tariff-related concerns, according to Timothy R. Fiore, who oversees the reports, they “reflect continued expanding business strength.”
Many of the internals also showed American manufacturing remains firmly in growth mode. In particular, new orders and employment both continued increasing. Yes, they were increasing at slower paces than in September. But businesses believing that big trouble lies ahead usually don’t keep ordering more stuff (and manufacturers’ customers generally include other manufacturers as well as companies in other parts of the economy) and adding more workers. They start pulling back.
The Markit.com October U.S. manufacturing Purchasing Managers’ Index (PMI) revealed even stronger reasons for optimism about domestic manufacturing’s foreseeable future, and for its ability to thrive despite any near-term hits delivered by Trump-ian trade policies.
Markit.com also uses 50 as its dividing line between expansion and contraction, and it emphasized that is 55.7 score for October was a five-month high. In addition, it “signalled a further pick up in growth momentum and a strong improvement in the health of the manufacturing sector.”
And the internals? If anything, they were even better. Markit.com did describe the price pressures faced by American manufacturers as “intense” and blamed them “largely” on “higher raw material and metal prices stemming from the ongoing effects of tariffs.”
Nonetheless, the October survey also reported that “Driving the latest development in the health of the sector was a sharp increase in new business. The upturn in total new work reached a five-month high….” Additionally, “Greater production requirements and efforts to clear backlogs meanwhile led to a quicker monthly rise in hiring, the fastest for ten months.”
Pessimists can point to Markit’s observation that “firms registered a strong rise in buying activity amid reports of greater efforts to stockpile….” That’s evidence that manufacturers were drawing purchases forward in hopes of escaping the costs of future tariffs. At the same time, companies rarely build inventories unless they’re confident they can sell the stockpiled stuff further down the line. And indeed, according to Markit, “output expectations towards the coming 12 months improved, with firms suggesting that anticipations of further new order growth drove optimism.”
The only significant fly in this ointment concerned inflation. Markit.com’s Chris Williamson wrote that “In a clear sign that inflationary pressures are continuing to build, strong customer demand meant firms were often able to push cost increases through to selling prices. Average prices charged for goods leaving the factory gate consequently jumped to one of the greatest extents seen since mid-2011.”
So far, these price increases haven’t shown up in the official data (see here and here), but certainly they could. In fact, the entire sunny picture painted by these surveys, and the government figures, could darken all of a sudden, and tariffs might be to blame. But for the time being, nothing of the kind has happened. So when you see news reports or other statement to the contrary, predicting a future of trade war-produced future of gloom and doom, you can be surer than ever that the sources don’t believe that Facts Matter.