U.S. manufacturing activity remains on the brink of contraction in October

The Institute for Supply Management (ISM) manufacturing index was little changed in October, slipping by a marginal 0.1 point to 50.1. The reading was largely in line with consensus expectations, which called for the index to ease to 50.0.  

The details of the report were somewhat mixed. On the bright side, new orders (+2.2 points to 52.9) and production (+1.1 point to 52.9) have improved for the first time in three months. The backlog of orders (+1.0 to 42.5), prices (+1.0 to 39.0), and exports (+1.0 to 47.5) subcomponents also fared better, but remain stuck in contractionary territory. On the other hand, employment, inventories, customers' inventories and imports have all declined on the month. The employment subcomponent has fallen for four consecutive months, and is now at the lowest level since the recession.    

The spread between new orders and inventories - which tends to lead the headline index by about three months - widened to 6.4.

Softness in manufacturing activity was also apparent across industries. Half of the industries surveyed reported contraction in October, among them were Apparel, Leather & Allied Products, Primary Metals, Petroleum & Coal Products, Plastics & Rubber Products, Electrical Equipment & Appliances, Machinery, Transportation Equipment, Wood Products, and Computer & Electronic Products.

October marked the second consecutive month that the ISM manufacturing index narrowly escaped being in contractionary territory. The persistent weakness in the U.S. manufacturing sector is disappointing but not surprising given that it continues to face a trifecta of headwinds: soft global economic activity, weakness in domestic oil-related sectors, and the impact of a strong U.S. dollar. These headwinds have eased slightly as the underlying conditions have stabilized somewhat, leading to some improvement in new orders and production. But, the overarching weakness will remain for some time still, with manufacturing activity likely to remain subdued well into 2016.

The strength of the U.S. dollar, in particular, is not expected to abate any time soon. While the greenback has given up some of its strength after the Fed decided against raising rates in September, the pullback was short lived. The Federal Reserve remains on track to raise rates in the near-future, while many other advanced economy central banks continue to step up stimulus, suggesting that the dollar strength is likely to persist.

Still, while under pressure from a lofty greenback, U.S. manufacturers could benefit from improving global demand should the favorable exchange rate continue to boost Eurozone economic activity. So far, the low euro appears to have benefitted Eurozone manufacturers, with the sectoral PMI registering improving readings and moving more firmly into expansionary territory.

"Further reprieve will come from strength of the domestic economy. The recent GDP reading has reaffirmed that domestic demand continues to fare will, with U.S. consumer spending expanding by 3.2% (annualized) in the third quarter of 2015, with vehicle sales and housing market remaining bright spots", says TD Economics.