Manufacturing Expands in September

Tempe, AZ, October 4, 2005 -- Manufacturing activity was surprisingly robust in September as new orders jumped in the aftermath of Hurricane Katrina, while August construction spending rose at a record rate, data released on Monday showed. The Institute for Supply Management said its monthly indexes of manufacturing activity for September was 59.4, well above average expectations of a drop to 52.0 and the 53.6 level seen in August. However, ISM cautioned that the jump was primarily driven by demand following the hurricane, which devastated the Gulf of Mexico coast at the end of August, and that the impact likely would be temporary. "The flurry of activity and the strength of new orders -- I don't think that is a business cycle issue, that is an event-cycle issue driven by the storm," said Norbert Ore, chair of the ISM business survey committee. Within the overall index, the new orders component rose to 63.8 in September from 56.4 in August, while the prices paid portion of the index jumped to 78.0 from 62.5. The rise in prices paid was seen by financial markets as heralding increasing inflation, which will likely spur the Federal Reserve to keep raising interest rates. Signs of a healthy manufacturing sector and expectations of more rate hikes drove down both U.S. Treasury bond prices and stock prices. The dollar strengthened, rising to a 16-month high against the Japanese yen and a three-month peak against the euro. "The ISM manufacturing number was really stronger than expected," said Firas Askari, head of FX trading at BMO Nesbitt in Toronto. "Obviously we've seen a sell-off in the U.S. bond market. As a result of this, people are calling for one or two more Fed moves." The rise in the prices component also was a reflection of soaring energy costs and could prove fleeting, Ore said. "The jump in prices paid is a matter of the multiple orders being placed plus the energy prices shooting up," Ore said, adding: "I would expect that over the next couple of months after this initial level of activity, they would start to back off again -- I don't think that will continue." The increase in manufacturing follows closely on the heels of other data pointing to healthy factory activity shortly after the hurricane. Data last week showed business activity in the U.S. Midwest bounced back strongly in September, with traders saying hurricane-related new orders helped boost the National Association of Purchasing Management-Chicago business index. Also, the National Association of Purchasing Management-New York said last week its September business conditions index rose to its highest level in at least eight years. The hurricane did not seem to immediately scar the auto industry, as U.S. automobile sales for September were on track to forecasts with annualized September auto sales of about 12.8 million as of Monday afternoon, when most auto companies had reported sales figures. The September sales were just above analysts' average expectation of annualized sales of 12.7 million, but below sales of about 13.3 million in August. Another report, one from the Commerce Department, showed that prior to the hurricane, August construction spending in the U.S. grew by 0.4% to a record $1.109 trillion rate versus a revised increase of 0.3% in July. The rise matched economists' expectations. The department said Katrina had no impact on the month's numbers and that its impact for the full year 2005 on U.S. construction spending was likely to be "minimal." This is because the hardest-hit states -- Louisiana, Mississippi and Alabama -- accounted for slightly more than 3% of total construction spending last year, the government said.