Latest ISM Report Suggests Recovery in Manufacturing Sector

The October report from the Institute for Supply Management (ISM) has shown that economic activity in the US manufacturing sector expanded in October for the third consecutive month. Conventional wisdon suggests that such a sequence is confirmation of a well established recovery.

The Institute uses its Purchasing Managers' Index (PMI) as an indicator of performance. A PMI score of below 50 indicates that the sector is contracting, whilst a score above 50 indicates that the sector is expanding. The data for the index is collected using a survey of 400 purchasing managers in the manufacturing sector on five elements; production level, new orders from customers, speed of supplier deliveries, inventories and employment level. Previous studies have shown that the PMI gives reasonably good correlation with the state of the economy and GDP growth.

The index has rebounded from a low point of 32.9% in December 2008 and the chart shows that the growth has been steady over the last year.

Chemicals and plastics reported growth as did petroleum and coal products. Respondents were also positive about the employment outlook in manufacturing.

Although these figures are good news there are still concerns about the 'China Effect' in the chemical industry, with much of the extra demand coming from the Chinese government stimulus packages and the easy availability of finance in China. We also still have the effects of US and European local stimulus packages such as 'cash for clunkers'. On the other side of the equation, housing starts remain low, meaning less chemical consumption and unemployment is still rising, which will have an impact on consumer spending.

Mixed news is better than bad news but it is difficult to be certain about whether or not this really is sustained recovery until a clearer picture emerges.

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