Manufacturing in the US expands at its fastest pace in two years

US manufacturing expanded in October at its fastest pace in more than two years, fuelled by the strongest growth in orders since early 2004 and a pick-up 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 on Monday. 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 pick-up in production and encouraged more producers to recruit more employees.

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.

“Manufacturing performed well for the third straight month, with demand, consumption and inputs registering growth indicative of a normal expansion cycle,” Timothy Fiore, chairman of the ISM Business Survey Committee, said in a statement. “While certain industry sectors are experiencing difficulties that will continue in the near term, the overall manufacturing community continues to exceed expectations.”

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.

A measure of customer inventories retreated 1.2 points to 36.7, a fresh decade low. This was the sixth straight drop since the height of the pandemic and sets the stage for steady production growth in future 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.