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November 2, 2020 1:00 PM, EST

US Manufacturing Gauge Expands at Fastest Pace Since 2018

A worker welds a lawnmower frame.Luke Sharrett/Bloomberg News

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U.S. manufacturing expanded in October at the fastest pace in more than two years, fueled by the strongest orders growth since early 2004 and a pickup in employment.

A gauge of factory activity increased to 59.3 from 55.4 a month earlier, according to data from the Institute for Supply Management released on Nov. 2. Readings above 50 indicate manufacturing is expanding, and the index exceeded all economists’ estimates in a Bloomberg survey, which had a median projection of 56.

The figures follow a report last week that pointed to firmer consumer spending and income gains in September and suggest economic growth could be stronger than forecast this quarter, though still down from the third quarter’s record pace. Firmer demand helps explain the surge in the ISM’s gauge of orders, which was accompanied by a pickup in production and encouraged more producers to add to payrolls.

The COVID-19 pandemic weighed on factory output earlier in the year, but as businesses began to reopen, the manufacturing sector quickly recovered. Stronger sales and capital investment helped deplete inventories, resulting in increased factory orders.

“Customer inventories being too low is always good for future production,” Timothy Fiore, chairman of the ISM Business Survey Committee, said on a call with reporters. “This is a strong indicator that factories have an opportunity for the month of November and December.”

Fifteen of the 18 manufacturing industries tracked by the ISM reported growth in October, led by apparel and fabricated metal products.

The ISM measure of new orders jumped 7.7 points in October to 67.9, and the gauge of production advanced 2 points to 63. The group’s employment index showed expansion for the first time since the middle of last year, indicating more producers are adding to headcounts than reducing them.

U.S. manufacturing expands most in two years as lean inventories boost orders.

A measure of customer inventories retreated 1.2 points to 36.7, a fresh decade low. The drop was the sixth straight since the height of the pandemic and sets the stage for steady production growth in coming months. The ISM measure of factory stockpiles rose to 51.9 from 47.1.

Another welcome development was an increase in the exports index, which rose to the highest level in more than two years and indicated a firming in overseas demand.

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