The Institute for Supply Management's (ISM) latest Manufacturing ISM Report On Business, released during the first week of October, reports that the nation's manufacturing sector grew in September, having shaken off the impact of Hurricane Katrina and notably expanding. This is the 28th consecutive month of growth for the manufacturing sector.

The institute's report proffered the news that the manufacturing index, which is compiled from a survey of purchasing executives in industries across the U.S., advanced to 59.4 percent last month, from 53.6 percent in August — the highest reading "since the gauge hit 59.6 percent in August 2004 and well above the 54 percent reading that analysts had expected," according to Associated Press. (A reading above 50 percent indicates that it is generally expanding; below 50 percent indicates that it is generally shrinking.)

"While energy prices and the impact from Hurricane Katrina are major concerns, the manufacturing sector has regained significant momentum," Norbert J. Ore, chairman of the institute's business survey committee, said in the ISM report released on Oct. 3.

Simultaneously, however, there came an unwanted omen: prices for raw materials surged in September, strengthening the likelihood of higher inflation and interest rates. According to an Oct. 4 article in IndustryWeek, prices that manufacturers paid for materials significantly increased "a dramatic 15.5 points in September, [which is] worrisome because it could increase inflationary pressures within the economy and make the Federal Open Market Committee less likely to halt the series of quarter-point interest rate increases" that began in June 2004.

According to AP, Ore says that last month's strength "came from expansion in new orders and production."

In a wire report published in the Orlando Sentinel, Ore is quoted as saying that the September manufacturing report, in fact, was heavily influenced by Katrina. For example, he points out that "a good part of the rise in new orders appeared to be manufacturers scrambling for alternate suppliers after regular sources were shut down by the storm," at which point companies have to pay a premium for necessary raw materials because they're off contract.

We'll wait and see how much of these higher costs, if any, manufacturers will pass on to consumers, or if higher costs will more likely impact only corporate profits.

References:

September Manufacturing ISM Report On Business
Institute for Supply Management, October 3, 2005
http://www.napm.org/ISMReport/ROB102005.cfm

September Manufacturing Index Surprises On Upside
John S. McClenahen
IndustryWeek, Oct. 4, 2005
http://www.industryweek.com/ReadArticle.aspx?ArticleID=10828

Sept. Manufacturing Rises Despite Katrina
Eileen Alt Powell
Associated Press, October 3, 2005
http://biz.yahoo.com/ap/051003/economy.html?.v=6

Manufacturing accelerates
(wire report)
Orlando Sentinel, October 4, 2005
http://www.orlandosentinel.com/business/orl-econ0405oct04,0,6754724.story?coll=orl-business-headlines