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U.S. manufacturing firms signaled a strong start to the final quarter of 2018, with operating conditions improving at a faster pace in October. Driving the latest development in the health of the sector was a sharp increase in new business. The upturn in total new work reached a five-month high, though only a fractional rise in new export orders was registered. Greater production requirements and efforts to clear backlogs meanwhile led to a quicker monthly rise in hiring, the fastest for ten months. Price pressures remained intense, however, with rates of input price and output charge inflation accelerating. At the same time, business confidence picked up from September's 12-month low.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 55.7 in October, broadly in line with September's reading of 55.6. The latest figure signalled a further pick up in growth momentum and a strong improvement in the health of the manufacturing sector. Moreover, October's reading reached a five-month high.
The headline PMI was driven by a stronger expansion in new business received by goods producers in October. The upturn in new orders accelerated to a five-month high and was widely attributed to greater client demand across the domestic market. Conversely, new export orders grew only fractionally and at the weakest pace in the current three-month sequence of growth.
Production levels expanded strongly in October and at a rate that was broadly in line with the series trend. Panellists commonly attributed the rise in output to greater client demand and increased efforts to clear backlogs.
In line with another rise in backlogs and a sustained increase in new business, employment growth accelerated in October. The rate of job creation reached a ten-month high and was strong overall. Respondents also noted that anticipations of greater new orders during the fourth quarter had led to the upturn.
Manufacturing firms recorded pressures on profit margins in October, with the rate of input price inflation quickening to a marked pace. The rate of increase reached a three-month high and was largely linked to higher raw material and metal prices stemming from the ongoing effects of tariffs.
Consequently, manufacturers tried to partly pass on higher cost burdens to their clients through increased output charges. Although the rate of output price inflation accelerated to the fastest since July, it remained well below that seen for input costs.
Meanwhile, firms registered a strong rise in buying activity amid reports of greater efforts to stockpile. Pre-production inventories increased for the seventeenth month running, albeit modestly, as longer input deliveries curbed stock building efforts.
Finally, output expectations towards the coming 12 months improved, with firms suggesting that anticipations of further new order growth drove optimism.
Commenting on the PMI data, Chris Williamson, chief business economist at IHS Markit said:
"The manufacturing sector saw a strong start to the closing quarter of 2018, with new order inflows rising sharply and business optimism spiking higher in an encouraging sign that firms expect the good times to continue into 2019.
“The increasingly bullish mood was also reflected in one of the largest monthly increases in factory payroll numbers seen over the past seven years as firms grew capacity to meet rising workloads.
“The key area of concern remained tariffs, which were widely reported to have contributed to another month of stalled export sales and a steep rise in prices for many inputs. Average input prices rose at one of the sharpest rates seen over the past six years in October. In a clear sign that inflationary pressures are continuing to build, strong customer demand meant firms were often able to push cost increases through to selling prices. Average prices charged for goods leaving the factory gate consequently jumped to one of the greatest extents seen since mid-2011.”