U.S. Manufacturing Shows Improvement But Hiring Lags -- Update

By David Harrison and Paul Hannon

U.S. manufacturing activity continues to rebound from the sharp downturn last spring, when factories closed to contain the spread of the novel coronavirus.

A pair of new manufacturing surveys released Thursday shows firms saw solid demand domestically and from abroad in September, leading to backlogs of new orders.

The Institute for Supply Management said its purchasing managers index of manufacturing activity registered 55.4 in September, indicating the fourth straight month of expansion. A reading above 50 indicates that activity is increasing, while a reading below points to a decline in activity.

Despite the gains, manufacturing activity in August remained 7.3% below its February level, according to Federal Reserve data released last month.

About 12.1 million people worked in American manufacturing in August, roughly 700,000 fewer than before the pandemic, according to the Labor Department.

Meantime, an ISM subindex of employment, at 49.6, indicated that factories continued to shrink their workforce in September, though at a slower pace than in previous months.

"The employment side, which generally lags everything, has been doing better since it troughed out several months ago," said Timothy Fiore, who runs the ISM manufacturing surveys. "Overall everything kind of looks good."

Data firm IHS Markit, in a separate survey also released Thursday, said its purchasing managers index of manufacturing activity rose slightly to 53.2 in September from 53.1 in August. That survey showed a slight uptick in employment in September.

"Companies reported a marked upturn in demand for plant and machinery, which suggests firms are increasing their investment spending again after expansion plans were put on hold during the spring," said Chris Williamson, chief business economist at IHS Markit. "Similarly, fuller order books helped drive further job creation as firms continued to expand capacity."

The manufacturing results come amid indications that the economic recovery is losing momentum. Household spending rose 1% in August from the previous month, a slower pace than earlier in the summer, the Commerce Department reported Thursday.

Meantime, personal income fell 2.7% in August due to the expiration of expanded unemployment benefits.

Also, the Labor Department said first-time claims for unemployment remained high, at 837,000 for the week ended Sept. 26. Several major employers, including airlines, theme parks and restaurants have announced layoffs in the past few days.

The Labor Department is set to release its September jobs report Friday. Economists surveyed by The Wall Street Journal expect it to show employers added 800,000 new jobs last month, pushing the unemployment rate down to 8.2% from 8.4% in August. That would represent a historically strong pace of growth, albeit slower than August, when 1.4 million workers gained jobs.

Mr. Fiore pointed to several headwinds that could slow the pace of the manufacturing recovery. First, a rise in coronavirus infections this fall could prompt more businesses to shut down and workers to stay home. Second, schools' move online could keep many parents home from work. Finally, uncertainty around the presidential election could prompt firms to postpone investments.

The picture is similar in Europe and Asia, where manufacturers continue to cut jobs even though they have recovered much of the ground lost during the coronavirus-induced lockdowns earlier this year.

Meanwhile, unemployment in the eurozone edged up in August, despite heavy government subsidies aimed at saving jobs and businesses.

IHS Markit said its manufacturing Purchasing Managers Index for the eurozone rose to 53.7 in September from 51.7 in August.

Much of that growth in activity was concentrated in Germany, where businesses reported a strong pickup in export sales. Germany has stood out among rich countries for the strength of its recovery, boosted by the fact that it is a major supplier of machine tools and other investment goods to a resurgent China.

The revival in Germany's exports had a positive knock-on effect in economies that are closely linked with Europe's manufacturing powerhouse, including Poland and the Czech Republic.

However, the European Bank for Reconstruction and Development lowered its growth forecasts for this year and next for 36 countries in Eastern Europe, North Africa and central and western Asia, since restrictions on activity intended to clamp down on the virus have lasted longer than expected.

Despite the revival in output and order books, manufacturers in the eurozone continued to cut jobs, although only modestly. The European Union's statistics agency Thursday said 251,000 people lost their jobs in August, pushing the unemployment rate up to 8.1% from 8%.

Economists expect that rate to rise over the coming months as furlough plans become less generous and some businesses prepare for a slowing recovery, with fresh outbreaks of the virus continuing to damp demand.

"Globally, what we have seen is that exports of services are not recovering as fast as exports of manufactured goods," said Beata Javorcik, the EBRD's chief economist. "Some businesses will go bankrupt."

Parts of Asia also saw a pickup in factory output, most notably India, where the PMI jumped to 56.8 in September from 52 in August as export orders rose. However, even with that gain, jobs were lost.

Manufacturing activity also accelerated in the Philippines and Vietnam, aided by an increase in export orders. But there were declines in activity in Thailand, Indonesia and Malaysia, an indication that the global economic rebound remains fragile and patchy.

Write to David Harrison at [e-mail] and Paul Hannon at [e-mail]

(END) Dow Jones Newswires

10-01-20 1228ET