U.S. Factory Gauge Shows Third Straight Month of Contraction

(Bloomberg) --

A gauge of U.S. manufacturing trailed estimates for October and signaled the sector contracted for a third straight month, with the weakest production level since the last recession.

The Institute for Supply Management index rose to 48.3 from a 10-year low of 47.8 the prior month, compared with the median projection for 48.9. The report Friday showed three of five components -- new orders, employment and inventories -- rose from September but stayed below 50, the line separating expansion and contraction. The production component sank to a 46.2 in a fourth straight drop, though that may reflect the impact of the six-week walkout of General Motors Co. workers during the month.

Investors may have focused on the component increases and relief that the report wasn't worse. U.S. stocks extended gains after the release, with energy, industrial and materials companies leading the S&P 500 Index toward a record close. The yield on the 10-year Treasury increased.

The reading highlights the challenges for a manufacturing sector confronting headwinds ranging from the ongoing trade tensions with China to slowing global growth and the strong dollar. That's forced some producers to cut back on hiring and delay investment, though unemployment near a half-century low and a stable expansion show that the shaky sector isn't derailing the world's largest economy.

Twelve of 18 industries reported contraction, including primary metals and electrical equipment, ISM said in a statement. Global trade remained the biggest issue across industries, and transportation equipment was especially weak.

Several respondents commented about the GM strike and the grounding of Boeing Co.'s 737 Max airliner, which were factors that likely weighed on readings for employment, output and new orders, according to Timothy Fiore, chair of ISM's manufacturing survey committee. “If neither one of those issues existed that would have really provided some positive support to the PMI and might have even lifted it several points,” he said in a call with reporters.

ISM's employment gauge rebounded from a three-year low to 47.7, suggesting companies continue to cut staff but at a slower rate. Friday's Labor Department jobs report showed factory employment posted a second-straight drop in October, driven by the GM strike, as U.S. payrolls climbed.

Read more: U.S. Hiring Resilient With 128,000 Gain Amid GM Strike

While manufacturing only makes up 11% of gross domestic product, the concern is that the deterioration in the sector could spread. Federal Reserve Chairman Jerome Powell said Wednesday that consumers haven't shown signs of being affected by manufacturing weakness.

There have been indications of resilience for American producers that had been in recession earlier this year. The Fed's industrial production gauge rose at a 1.2% annual rate in the third quarter after declines of about 2% in the first and second quarters.

The crosscurrents for factories were visible in ISM trade data, with the measure for imports declining to a 10-year low of 45.3.

Meanwhile, the export orders index, a proxy for overseas demand, rebounded from a 10-year low with the biggest gain since 2011. That brought it to 50.4, back to a level signaling expansion for the first time since June and making it the only sub-gauge that's above that dividing line for October.

The new orders gauge rose to 49.1, and measures of both customer and business inventories also increased. The index of supplier deliveries slumped to the lowest level since February 2016.

The ISM's index of prices paid sank further below 50, suggesting inflationary pressures remain muted. Order backlogs declined.

--With assistance from Chris Middleton.

To contact the reporter on this story: Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns

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