You may have noticed that the business news headlines yesterday hyped stories that both U.S. and Chinese manufacturing sectors had very dramatic declines during the month of October.  While the index ratings are certainly a cause for concern, I would not recommend taking drastic gloom and doom reaction that seems to be the reaction of the business press.  

In the report concerning U.S. manufacturing, the PMI index from the Institute for Supply Management (ISM) fell to 38.9, reported as the lowest level in 26 years.  While business as usual was not the byword, a more detailed look at the actual ISM report indicates some logical explanations for the steep decline.  First, as highlighted in posts in Supply Chain Matters, October saw some of the upstream after-effects of the two hurricanes that struck the U.S. Gulf coast, impacting petroleum and petrochemical production.  October also included the total disruption of the Boeing supply chain as a result of a six week long work stoppage that began in September.  Aircraft represent a considerable value of shipments, and I suspect contributed to a lowered index. The after effects of the meltdown on Wall Street that impacted both the availability of credit, as well as the high uncertainty related to liquidity of large and smaller manufacturers no doubt also presented buyers and suppliers with a state of confusion.  One unreported aspect of the report was that there was actual manufacturing growth in the apparel and leather, as well as computer products sectors. So for all of these significant reasons, October should not have be considered a normal state of manufacturing.  The coming months should indicate a more meaningful trend, especially the trends reflected in new orders, backlog, and inventories.

China’s manufacturing activity also sharply slowed in October. An AP story indicated that the purchasing managers index produced by the China Federation of Logistics and Purchasing fell to 44.6 in October, the lowest level since the survey began in 2005.  Some of this decline can certainly be attributed to the spillover of the U.S. decline reported above.  Some of this decline can also be attributed to political after-effects of both the China central government’s attempts to cool-down what was becoming a highly inflationary economy, as well as the financial crisis in the U.S.  It seems that China’s manufacturing sector has never really recovered from the shutdowns imposed during the recent Olympic events in Beijing, and high profile quality and contaminated product stories in the news of late.

In my view, manufacturing activity originating in China is the real index for concern, since it represents a broader indicator of multi-industry manufacturing and supply chain activity. If over the coming months, manufacturers in China begin to find a lack of export demand for their goods, than some drastic measures may come about to insure survival.  Overcapacity leading to price dumping is not out of the question. This is the one set of factors watch in the coming months.

What’s your view on the current level of manufacturing activity?  Is it causing you real concern?  You can input your views in the Comments section of this posting.

Bob Ferrari