Manufacturing Output Trips Over the October Government Shutdown

Manufacturing

Source: http://www.flickr.com/photos/usnationalarchives/

The U.S. manufacturing sector continued to grow in October, although at the slowest rate in 12 months. Markit’s Flash U.S. Manufacturing PMI — which is an advance reading based on about 85 percent of total PMI survey responses — registered just 51.1 for the month, down from 52.8 in September.

“The flash PMI provides the first insight into how business fared against the backdrop of the government shutdown in October, and suggests that the disruptions and uncertainty caused by the crisis hit companies hard,” said Markit chief economist Chris Williamson. “The survey showed the first fall in manufacturing output since the height of the global financial crisis back in September 2009.”

Output — arguably the most highly watched component of the headline index — fell dramatically, from 55.3 in September to 49.5 in October, indicating contraction. The index for new orders declined from 53.2 in September to 51.6 in October, signaling reduced demand that could negatively impact the industry moving forward. Markit reports that a number of manufacturers linked lower output to the downward trend in new orders.

Between recent fiscal headwinds and the already anemic recovery, the manufacturing sector could end up floundering through the fourth quarter. A rebound of activity in November is entirely possible, but, as Williamson points out, “It is impossible to disentangle the impact of the shutdown from other factors that might have been at play during the month, so equally impossible to judge the extent to which business might bounce back.”

There is some encouraging news out of the report, though. The index for manufacturing employment increased from 51.3 to 52.3, signaling encouraging, if modest, payroll growth. The ADP National Employment Report for September showed 1,000 new payrolls in manufacturing. Markit reports that manufacturers linked new hiring to product developments. The decline in output and new orders could prove to have a negative impact on the employment index in the coming months, barring a November rebound.

Separately, the Federal Reserve Bank of Kansas City released the October issue of its manufacturing survey. The report shows that while there were some negative effects from the 16-day partial government shutdown, conditions still generally improved, although slightly. The composite index increased from 2 in September to 6 in October, a level that is still below the 8 registered in August.

“Several producers noted negative business impacts from the government shutdown, particularly related to delays in government inspections and approval processes, lack of data availability, and overall customer uncertainty,” the report says.

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