MNI INTERVIEW: ISM Manufacturing Seen Topping 50 By Year End

The Institute for Supply Management's closely-tracked gauge of U.S. manufacturing activity is set to show a return to growth by the end of this year, after three consecutive monthly gains have taken the measure to its highest in nearly a year, ISM manufacturing chair Timothy Fiore told MNI Monday.

"We can easily go to something above 50 in the next two or three months," said Fiore of the dividing line that separates contraction from expansion in the sector.

"This month supports that we can get above 50 by the end of the year. I don't really see us going backwards from this," he said. But "we're probably sitting at another 49 in October."

The ISM manufacturing index increased 1.4pp to 49.0 in September, better than expectations and the highest in 10 months. But September was the eleventh consecutive month the ISM reading was below 50 indicating contraction.

The improvement in the headline index was driven by increases in new orders (+2.4pp to 49.2), production (+2.5pp to 52.5) and employment (+2.7pp to 51.2). That was offset by a drop back in the supplier deliveries index (-2.2pp to 46.4).

OPTIMISTIC OUTLOOK

"Overall people are feeling that the economy is probably going to see the bottom sometime in the first quarter next year," Fiore said. "People are feeling better about the short- and moderate-term."

"We have gone from a worst case in June in which for every one optimistic comment there was one-and-a-half comments not optimistic. And we're now sitting at one to one. That's a positive trend."

Fiore said he is expecting new order levels to remain around 50, citing the holiday season as a reason to expect some growth. "I don't see us getting below a range of 48 to 52."

A possible government shutdown next month, further auto plant shutdowns, and increased energy prices are risks to the outlook, Fiore said, still downplaying the potential impacts. He said 8% of headline comments noted concerns about the UAW strikes, while some noted worries over a drought in the Panama Canal.

The September ISM report also showed prices subindex plunged 4.6pps to 43.8, but that is not expected to last. "Energy prices are staying up. It will bleed into everything: plastics, steel, transportation," he said. "We can easily go to something above 50 in the next two or three months."

LITTLE RISK FROM FED

The ISM chief did not cite the Fed as a risk to the outlook and downplayed the impact from the central bank's higher-for-longer interest rate strategy and the rise in 10-year Treasury yields to 16-year highs.

"As long as business has a decent idea of what to expect, they can deal with it," Fiore said. "I don't buy into it that it'll have a huge impact today." (See: MNI INTERVIEW: Higher Rates Finally Begin To Bite US Firms)

"If you told me that interest rates still have a long way to go to move up, then I would be more concerned. But I think we kind of all agree that we're near the top."