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Manufacturing posts big gain
ISM index jumps to 59.4, as growth posts big gain rather than forecast slowing in September.
October 3, 2005: 12:41 PM EDT

NEW YORK (CNN/Money) - Manufacturing growth surged in September, according to a closely watched survey of industry executives released Monday that came in much stronger than Wall Street expectations.

The Institute for Supply Management's manufacturing index came in at 59.4 for September, up from the 53.6 reading in August. It was the highest reading in the index in 13 months and came despite the shock of higher energy prices paid by many manufacturers in the month. Economists surveyed by Briefing.com had forecast the index would slip to 52 in September.

"While energy prices and the impact from Hurricane Katrina are major concerns, the manufacturing sector has regained significant momentum," said Norbert Ore, chairman of the Institute's Manufacturing Business Survey Committee. He estimated that the storm might have added as much as four to five points to this month's ISM index.

Ore said there was a jump in orders following the hurricane, not necessary from the hurricane-striken region itself, but from other companies that expect to be filling demand for replacing goods lost in the storm. There could also have been a pick up in business due to businesses whose normal supply chains were disrupted by the damage caused by the hurricane.

"There's always a degree of buyer panic in these cases; you might over order to make sure you get enough," he said.

The survey raised new inflation fears, though, as the prices paid index showed shot up to 78 from 62.5 reading in August. About 60 percent of those executives surveyed reported paying higher prices in the month, while only 4 percent reported paying lower prices.

By comparison, in August, 36 percent reported paying higher prices and 11 percent reported paying lower prices. As recently as July, more were reporting paying lower prices than higher prices.

Again, Ore said that beyond the jump in well-document jump in energy prices, the storms could have caused a tempory spike in prices paid as many businesses had to find alternative suppliers if their normal supply chain was disrupted by the storm.

"It's the difference between contract pricing and spot pricing," he said. "The good news is I think it's a spike. I think it'll settle down as supply is insured."

Bond prices fell sharply on the ISM report, and the yield on the 10-year Treasury shot up to 4.37 percent, with traders taking the report as further confirmation that the Federal Reserve will continue to raise interest rates rather than pause, as one Fed governor voted to do at the last meeting.

"If anything, this confirms the Fed's bias towards inflation rather than worrying about a slow down in growth," said Wachovia Securities economist Gina Martin. "The Fed seems to have no worries about growth, as least as far as manufacturing is measured by ISM."

Martin said it appears the goods-producing sector seems to be getting a bit of a sugar rush from the two major hurricanes to hit the U.S. Gulf Coast in the last five weeks. There is a growing anticipation on the part of executives that there will be demand for products partly to replace what was lost in the storm, with insurance settlements and federal assistance going to help pay for such recovery efforts.

Other numbers in the ISM index watched by economists showed strength. The survey's new orders index shot up to 63.8 from 56.4, as those reporting more new orders increased to 35 percent from 29 percent in August, while those reporting weaker orders fell to 12 percent from 21 percent.

Gains in the production index almost mirrored those in new orders, while employment showed more modest improvement.

Any result above 50 in the manufacturing index indicates growth in the goods-producing sectors of the U.S. economy. This marked the 28th straight month of growth, according to the index, the longest such expansion in more than 16 years. The rise in September was the biggest one-month jump since June 1991.

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