Following several months of lackluster growth, the manufacturing sector expanded at a faster rate in October, rising to a five-month high and boosting prospects for a stronger recovery.

After experiencing a slackening pace of expansion in September and through most of the summer, manufacturing in the United States is beginning to strengthen its pace of recovery, posting accelerated growth in October and boosting economic health for the third quarter. While the rate of new orders is improving, concerns remain over inventory levels and imbalances in international trade.

According to the Institute for Supply Management’s latest manufacturing Report on Business, released yesterday, U.S. manufacturing grew for the 15th consecutive month in October, as did the overall economy, which expanded for the 18th month straight.

The ISM’s purchasing managers’ index (PMI), a key monthly indicator for the factory sector, climbed to 56.9 in October, the highest level since May. Readings above 50 indicate growth. Up from the 54.4 reading in September, the 2.5-point October gain in the PMI shows that the manufacturing sector is expanding at a faster month-to-month pace. Last month’s PMI was even with the 12-month average of 56.9.

The ISM’s new orders index also saw a major boost in October, rising from 51.1 in September to 58.9. Meanwhile, production grew from 56.5 to 62.7; employment increased from 56.5 to 57.7; prices inched upward from 70.5 to 71; and inventories dropped from 55.6 to 53.9. Supplier deliveries slowed last month, falling from 52.3 in September to 51.2.

“Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month’s report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter,” according to Norbert J. Ore, chair of ISM’s Manufacturing Business Survey Committee. “Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October.”

In the ISM report, 14 of the 18 industries tracked posted growth last month: apparel and leather; primary metals; petroleum and coal products; machinery; electrical equipment, appliances and components; miscellaneous manufacturing; fabricated metal products; paper products; printing and related support activities; transportation equipment; computer and electronic products; food, beverage and tobacco products; plastics and rubber products; and chemical products.

Experts attribute much of last month’s gains to a more beneficial trading balance that favored U.S. manufacturers over international competitors.

“The important reason for the October rebound is the reversal of the trade situation,” Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the ISM report. “Export growth reportedly surged while import growth backed off. In other words, less domestic spending was drained away to support foreign manufacturing and more production was directed to domestic producers.”

In addition to the growing export market, the strong increase in new orders signals renewed demand for manufactured goods. However, the gains may not be sufficient to bolster the general U.S. economy for a prolonged period, as consumer spending, which is still the largest portion of economic activity, remains depressed.

“The lackluster spending is tied to tight budgets. With the unemployment rate at 9.6 percent and high joblessness expected for a while, Americans are uneasy,” the Wall Street Journal explains. “And many families are increasingly reliant on government benefits to get by. Waning support from emergency unemployment insurance pulled personal incomes down by 0.1 percent in September. Contributions from jobless benefits fell by $25.5 billion at an annual rate following a $20.5 billion boost in August.”

Although shrinking inventories among manufacturers suggest that production may be ramping up, it remains to be seen whether spending levels will rebound in the coming future.

“The jump in October could ease concerns that companies are almost through rebuilding their stockpiles — a trend that appeared to be slowing factory output growth in recent months,” the Associated Press reports. “Still, much of the U.S. economy’s health depends on consumer spending and the gains in manufacturing can’t be sustained unless that picks up.”

Earlier

Manufacturing Growth Slows Again

Manufacturing Expands for 10th Month Straight

Resources

October 2010 Manufacturing ISM Report on Business
Institute for Supply Management, Nov. 1, 2010

MAPI Analysis on ISM Index: ‘Surprisingly Strong Rebound’
Manufacturers Alliance/MAPI, Nov. 1, 2010

New Orders, Exports Boost Manufacturing
by Sara Murray
The Wall Street Journal, Nov. 2, 2010

Manufacturing Activity Surges in October
by Christopher S. Rugaber
The Associated Press, Nov. 1, 2010