- Manufacturing picked up again. The Institute for Supply Management’s manufacturing index rose one point to 55.5 in October, the second-highest reading in more than four years, data showed Monday. The figure topped all but one forecast in a Bloomberg survey of economists, and readings above 50 indicate expansion.
- Production and orders are strong. The production gauge posted its best reading since late 2021, while new orders, a sign of demand, were the highest since July. The index has now pointed to growth for 10 consecutive months, reversing a roughly three-year slump for the sector.
- Factories are hiring. Factory headcount increased in October for a fourth month, the longest such stretch since early 2022. Twelve industries reported growth, including electrical equipment, machinery and computer and electronic products, while printing, paper and nonmetallic minerals contracted.
- Price pressures have not gone away. ISM’s prices gauge fell to 75.2 from the prior month but remained higher than before the Middle East conflict began, and supplier delivery lead times lengthened again. The Fed’s preferred inflation measure rose 3.6% from a year earlier in September, well above the central bank’s 2% goal.
What Happened?
The ISM report showed factories benefiting from strong economic growth, resilient consumer demand and solid business investment. The US economy expanded in the third quarter at the fastest pace in a year, helped by business outlays on data centers, artificial intelligence and industrial equipment, according to Bloomberg. Purchasing managers’ comments pointed to the same drivers: one machinery respondent said “explosive growth in the semiconductor and government/defense spaces has put us on our heels,” while another said “any commodity consumed by AI/data centers is in a crunch, both for supply and pricing.”
Why It Matters?
A manufacturing sector running at its second-strongest pace in more than four years supports the view that the US economy is still expanding solidly. But the details are a problem for the Federal Reserve: an elevated prices gauge, longer lead times and complaints about diesel costs and trucker shortages suggest goods inflation remains sticky. Respondents also flagged policy uncertainty, including Canadian tariffs hurting small US exporters and the midterm elections clouding research funding, which shows the boom is uneven across industries.
What’s Next?
Investors will look to upcoming services and labor data to see whether the strength in factories is broad-based. With inflation well above target, a hot ISM reading adds to the case for tighter Fed policy, so watch how rate expectations and Treasury yields respond. Manufacturers will also be watching commodity prices and supply chains tied to the Iran war and AI-driven demand.
Affected Tickers and Coins: XLI, SPY, TLT
Source: Bloomberg
