The Index Counted the Warehouse
For 25 straight months, more American factories have reported higher input prices than lower ones. Their delivery times have been lengthening for 11 of those months.
The Manufacturing PMI reached 55.5 percent in October, up a point from 54.5 in September. The Institute for Supply Management published the figure on November 2, against an estimate that matched September's 54.5.
Production rose to 59.0, its highest reading since November 2021. More firms reported making more, which is what that index counts.
The reports led with the beat and with a tenth straight month of expansion.
The key observation is that inventories supplied more of the month's increase than production did.
Five sub-indexes go into the headline.
New orders, production, employment, supplier deliveries and inventories each carry a fifth. Add the five October readings and divide by five, and the answer is 55.5.
Inventories rose 2.8 points to 51.4. That one move accounts for more than half of the point the headline gained.
Production rose 2.3 points and supplied the rest. Employment fell to 52.4 from 52.7, new orders rose 0.2, and supplier deliveries rose 0.1.
Two of the five lines did the work. One of those two counts goods that have not been sold.
The other three netted to nothing between them. The headline still moved a full point.
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This is a production-order gap.
A factory's inventory covers both the materials it bought and the goods it has not yet shipped. The index treats a rise in it as expansion, on the reasoning that stock builds ahead of demand when order books are filling.
The order books were filling more slowly. Backlogs eased 1.8 points to 54.6, and new orders moved two tenths of a point.
The release records the build. It does not record what the build was for, and a diffusion index never does.
Supplier deliveries carry the same ambiguity, and they carry it upward. That index is inverted, so slower deliveries push the headline higher rather than lower.
That 59.1 was the highest of the five sub-indexes, and the line has read slowing for eleven months running. The Institute notes that slow deliveries are typical when demand is rising, which is an assumption about cause rather than a measure of it.
Prices stayed high through all of it. The prices index was 75.2, down from 77.9 and above 50 for a 25th month.
A reading above 50 there means more firms paid more than paid less. It does not say by how much.
Imports rose 1.9 points to 52.9. Some of what reached those warehouses was bought abroad.
Twelve of the eighteen manufacturing industries reported growth. Printing, paper products and nonmetallic minerals reported contraction.
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Where the stock goes
The ratio of manufacturers' inventories to shipments. The Census Bureau publishes this monthly, and it measures the stock against what actually left the plant. A rising ratio would show the goods sitting rather than moving. A flat ratio would show shipments keeping pace with what was built. (Source: Census Bureau)
Stocks of finished goods in the manufacturing survey. This asks firms directly whether their own warehouses grew, and it arrives on the first business day of the month. A build alongside soft new orders would confirm the gap. A drawdown would show the goods finding buyers. (Source: S&P Global)
Manufacturing output in the industrial production figures. This counts physical volume rather than the share of firms reporting more of it. Continued growth would match what the survey reported. A flat line would place the strength in the count of firms and not in the quantity made. (Source: Federal Reserve)
An inventory build and a sale look identical on a production line. They look identical to this index too, and only one of them brings the money back.
Talk soon,
The Playbook Daily
