The institute for supply management released the Manufacturing ISM Report on Business this morning. "Economic activity in the manufacturing sector expanded in October for the third consecutive month, and the overall economy grew for the sixth consecutive month" said the Institute.

The Primary Manufacturing Index was reported at 55.7, better than economist estimates for a read of 53.0 and improved from last month's 56.6. The manufacturing ISM report,at it's highest level since April 2006, was led higher by concentrated gains in Production and Employment, +7.6% and +6.9% respectively.

The prices paid index was 65.0 vs. consensus 64.0 vs. 63.5 in September and the New Orders Index registered a print of 58.5 vs. 60.8 in September

In October, 13 of the 18 manufacturing industries reported growth.

The industries — listed in order — are: Petroleum & Coal Products; Apparel, Leather & Allied Products; Furniture & Related Products; Chemical Products; Computer & Electronic Products; Transportation Equipment; Plastics & Rubber Products; Machinery; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Fabricated Metal Products; Electrical Equipment, Appliances & Components; and Paper Products.

The three industries reporting contraction in October are: Nonmetallic Mineral Products; Primary Metals; and Wood Products.

Here is what survey respondents are saying:

• "We are beginning to be affected greatly by lead-time increases on semiconductor components." (Computer & Electronic Products)
• "Still a very difficult environment — commodity increases threaten recovery and don't seem to correlate with any supply/demand fundamentals." (Food, Beverage & Tobacco Products)
• "Automotive demand still remains strong even after 'cash for clunkers.'" (Fabricated Metal Products) [indicated for the second month]
• "After several rather busy months, we are seeing the order intake for early next year soften." (Transportation Equipment)
• "The improvement seen earlier is not holding." (Primary Metals)

I found the comments made by Norbert J. Ore CPSM, C.P.M., the chair of the Institute for Supply Management Manufacturing Business Survey Committ, very interesting. Here is what he had to say...

"The jump in the index was driven by production and employment, with both registering significant gains. Production appears to be benefiting from the continuing strength in new orders, while the improvement in employment is due to some callbacks and opportunities for temporary workers. Overall, it appears that inventories are balanced and that manufacturing is in a sustainable recovery mode."

We expect to see temporary hiring continue as demand fluctuates. This is a function of firms looking to keep balance sheets nimble to maintain profitability in periods of seaosonal slowness. In the short run these stints of added employment will be benefical to consumer spending, however in the long run, unless consumer spending picks up and maintains progress, we anticipate the cycle of temporary hiring will keep economic activity sporadic and month to month data volatile.

One caveat: the US economy has evolved from being driven by manfucturing to one which is lead by the services sector. So the extent to which this data has macroeconomic influence has lessened as technology has become the main source of productivity in the US. 

The stronger than expected read on manufacturing employment and rising prices are both supportive of the Federal Reserve's dual mandate "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates". Given the fact that fixed income traders are somewhat nervous about a change to the FOMC's verbiage regarding interest rates being held near record low  levels for an "extended period of time", the bond market did not react well to this report. However, the uncertain long term economic outlook and the previously discussed expectations for "choppy" economic data are helping keep the rates market range bound, something that has occurred since mid-summer. I would expect the trend of no trend (range bound) to hold constant until the Federal Reserve begins open implying they are preparing to raise short term interest rates.