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Highlights
Indications on the manufacturing sector have been mixed but today's ISM's report definitely points to strength. The ISM's manufacturing index did fall back 2.1 points to 53.6 but the new orders component, the report's leading indication for future activity, surprisingly moved back to a 60 handle, at 60.3 for a 1.8 point gain. New orders were very strong in August, at 64.9, and in September, at 60.8, but given rising month-to-month comparisons the outlook for new orders was for a run of mid 50s readings. Backlog orders also increased in the month but, at 52.0, rose at a slower rate than October's 53.5 level. Still, acceleration in new orders and gains in backlogs are a healthy mix pointing to rising production and rising employment ahead. Note that export orders, benefiting from the weak dollar, were also strong, up 1/2 point to 56.0.
Production and employment actually weighed on the headline index in November. Production fell back more than 3 points but is still very strong at 59.9. Employment is also much improved, holding above 50 at 50.8 though down more than 2 points from October's very strong level of 53.1. Note though that readings in the low 50s for this index have not correlated with underlying expansion in manufacturing payrolls. Inventories also weighed on the main index, down about 5-1/2 points to 41.3. But, given the strong production reading, the decrease doesn't point to destocking efforts, only a draw related to production needs.
The depth of orders, underscored by wide breadth across 13 of 18 industries, points to solid recovery for manufacturing and will ease concerns that the sector might dip back into contraction. Stocks and commodities moved higher in reaction to the report.
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Market Consensus Before Announcement
The composite index from the ISM manufacturing survey jumped more than 3 points in October to 55.7. This is the strongest for this index in more than three years. Showing the most improvement of the composite's components was the production index which advanced over 7-1/2 points to 63.3. But we may see some leveling off in the composite index in November as the new orders index eased from 60.8 in September to 58.5 in October, but still remained well in positive territory. Price increases were steady in the month, showing little change at 65.0 compared to 63.5 in September.
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Definition
The Institute for Supply Management surveys more than 300 manufacturing firms on employment, production, new orders, supplier deliveries, and inventories. A composite diffusion index of national manufacturing conditions is constructed, where readings above (below) 50 percent indicate an expanding (contracting) factory sector. Export orders, import orders, backlog orders and prices paid for raw and unfinished materials are also measured, but these are not included in the overall index.
Why Investors Care
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