Accelerated growth in several key indicators last month boosted the momentum of the manufacturing sector's recovery following signs of slowing expansion in July and June. Improvements in production and employment in August eased concerns of a stalled recovery and strengthened manufacturing's position at the forefront of the economic rebound.

According to the Institute for Supply Management's latest manufacturing Report on Business, released yesterday, the manufacturing industry grew for the 13th consecutive month in August, in line with the overall U.S. economy, which expanded for the 16th month straight.

The ISM report's purchasing managers' index (PMI), a monthly bellwether for the factory sector, rose from 55.5 in July to 56.3 in August. Readings over 50 indicate growth. The 0.8-point gain in the PMI shows that manufacturing is expanding at an increasingly faster rate, although the August reading remained slightly below the 12-month average of 56.6.

Although ISM's new order index slowed last month, decreasing from 53.5 in July to 53.1 in August, monthly production rose from 57 to 59.9, employment grew from 58.6 to 60.4 and the prices index rose from 57.5 to 61.5.

"Manufacturing activity continued at a very positive rate in August as the PMI rose slightly when compared to July," according to Norbert J. Ore, chair of ISM's Manufacturing Business Committee. "In terms of month-over-month improvement, the Production and Employment Indexes experienced the greatest gains, while new orders continued to grow but at a slightly slower rate."

According to the ISM report, 11 of the 18 manufacturing industries tracked recorded growth last month: primary metals; apparel and leather products; transportation equipment; fabricated metal products; electrical equipment, appliances and components; miscellaneous manufacturing; computer and electronic products; paper products; chemical products; food, beverage and tobacco products; and printing.

Some experts claim that much of the August gain may be attributed to the disproportionately larger impact of the recession on the manufacturing industry than on the general economy, as well as a resurgence in major purchasing.

"The strong growth in manufacturing production is partly catch-up for a substantially more severe recession in the industry than the overall economy," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, said in an analysis of the ISM report. "Also, the depth and length of the previous downturn built pent-up demand for replacing big-ticket consumer goods and repair and replacement in business. We expect manufacturing production to decelerate in the near term but still grow faster than overall GDP."

Although manufacturing has been one of the leading industries in the U.S. economic recovery, the slowdown in its growth rate this summer has raised concerns about a general slide in the economy. In fact, economists surveyed by MarketWatch forecast the PMI to drop in August to 53.2; the surprising August gains helped allay some of the worries.

"The August factory report is like a shiny holiday gift found lying among depressing lumps of coals," the Wall Street Journal's Real Time Economics blog notes. "Its unexpectedly optimistic tone was a nice contrast to the downbeat read on labor markets released Wednesday, and it supports the view that the U.S. economy — although weak — will avoid a double-dip recession."

An improving employment market is one of the key features of the latest manufacturing data. At 60.4, the August employment index was at its highest point since 1983. As manufacturing accounts for roughly 10 percent of all private-sector jobs, a boost in hiring may significantly affect broader employment trends.

"It appears from that figure that many companies were initially reluctant to believe the tide of new orders coming in would last and were reluctant to hire. The index for new orders went above 50 in May 2009, but it was not until December that the employment index went above that level to stay," business/economics writer Floyd Norris explains at his finance blog for the New York Times. "Now it is at the kind of level seen when business is booming."

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Manufacturing Expands at Slower Pace in July

Manufacturing Grows for 11th Consecutive Month

Resources

August 2010 Manufacturing ISM Report on Business
Institute for Supply Management, July 1, 2010

MAPI Analysis on ISM Index: Manufacturing Continues to Outperform General Economy
by Daniel J. Meckstroth
Manufacturers Alliance/MAPI, July 1, 2010

ISM Factory Index Rises to Much Better-than-Expected 56.3 Percent
by Greg Robb
MarketWatch, Sept. 1, 2010

Surprising Many, Manufacturing is Bright Spot
by Kathleen Madigan
Real Time Economics (The Wall Street Journal), Sept. 1, 2010

Employment Boom?
by Floyd Norris
Floyd Norris: Notions on High and Low Finance (The New York Times), Sept. 1, 2010