Manufacturing had some good and bad news in October.
First the downside. The sector still saw contraction, according to Friday’s Purchasing Managers Index (PMI) report, a manufacturing strength indicator from the Institute for Supply Management (ISM). At 48.3%, it shows contraction, as does any value under 50%.
The good news: things are better than in September, when the PMI was 47.8%. And it might have seen more improvement still except for GM and Boeing.
“It was a pretty strong contraction month for Transportation equipment,” the weakest manufacturing segment in the month, said Timothy Fiore, chair of the ISM’s manufacturing business survey committee, during a conference call with reporters.
“Since GDP is based on output, the GM strike, recently settled, will have the higher quarterly impact in the short run,” says Warren Barnett, president and portfolio manager at asset and wealth management consultant Barnett & Company. The six-week strike is over, although it did cost the company about $2 billion, additional costs for the striking workers who didn’t have a regular paycheck, and a ripple effect through the economy.
There are also continuing challenges. An Oct. 29, 2019 client note from RBC Capital Markets on GM points to market volatility in China and South America, declining sales volumes, and ramp-up costs for the launch of a new SUV model.
Boeing continued to build the 737 MAX “at a reduced rate, even if the company cannot deliver and get final payment for them,” Barnett says. That lowered immediate the GDP impact but not the ultimate cost. “This output has minimized Boeing’s adverse impact on GDP but will make its drag more pronounced in the future, especially if demand does not hold up and airlines order elsewhere.”
Boeing, while significant to the U.S. economy, is localized. “Beside Boeing, the rest of the aerospace business is fairly healthy right now,” says Matt Fish, a partner at OC&C Strategy Consultants. “Our clients are looking at a longer-term horizon, five years or so. We have not seen a pause with a private aerospace spend with any company having Boeing as a key customer.”
Chemical manufacturing is another part of the slowdown. “The chemical manufacturing industry is depressed,” one chemical industry respondent to the ISM survey. “Demand across many markets globally is down, and pricing is as a result.”
“Mid-market players have been under some price pressure for the last year now,” says Fish, who has seen softening prices as a result. “My hypothesis is that it’s finally starting to take a little bit of a bite. I do think that most companies are starting to take a more strict look at their operating expenses.”
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