U.S. manufacturing sector slows moderately in October

U.S. manufacturing activity slowed in October as a measure of new orders dropped to a 16-month low and factories continued to experience delays with deliveries of raw materials.

The Institute for Supply Management (ISM) said on Monday its index of national factory activity slipped to a reading of 60.8 last month from 61.1 in September.

A reading above 50 indicates expansion in manufacturing, which accounts for 12% of the U.S. economy. Economists polled by Reuters had forecast the index falling to 60.5.

The economy is struggling with shortages across industries as global supply chains remain clogged. Supply constraints, which were worsened by a wave of Covid-19 infections driven by the delta variant over summer, helped to restrain economic growth to its slowest pace in over a year in the third quarter.

The motor vehicle industry has been the hardest hit. Outside the shutdown in spring 2020, which severely depressed output, the third quarter was the worst period for motor vehicle production since early 2009. Economists and businesses expect supply chains could remain tight through 2022.

The ISM survey’s measure of supplier deliveries increased to a reading of 75.6 last month from 73.4 in September. A reading above 50% indicates slower deliveries. Longer waits for materials meant high inflation at the factory gate persisted. The survey’s measure of prices paid by manufacturers accelerated to 85.7 from a reading of 81.2 in September.

These higher costs are being passed on to consumers which, together with surging wage growth, is raising concerns that high inflation could be more persistent rather than transitory as Federal Reserve Chair Jerome Powell has repeatedly argued. The government reported on Friday that wage growth in the third quarter was the strongest on record.

The ISM survey’s forward-looking new orders sub-index dropped to 59.8 last month, the lowest reading since June 2020, from 66.7 in September. With customer inventories remaining depressed, a rebound is likely.

Subsiding coronavirus cases could, however, encourage more consumption of services and curb demand for goods. Though a measure of unfinished work dipped last month, order backlogs remain significantly high.

Factories hired more workers, with a measure of employment increasing to a reading of 52 from 50.2 in September. This, combined with a massive improvement in consumers’ perceptions of the labor market last month, suggest employment gains picked up in October after the economy created the fewest jobs in nine months in September.

Worker shortages, however, remain a constraint. There were 10.4 million unfilled jobs at the end of August. The Labor Department is scheduled to publish its closely watched employment report for October on Friday.