Although three of four key components retreated in November, each also continued to signal an expansion, and a modest retrenchment is not unusual following a period of gains.
November's ISM report also marked the 16th consecutive month manufacturing activity expanded.
ISM Index readings above 50 indicate an expansion in the sector, while readings under 50 point to a contraction. Economists surveyed by Bloomberg had expected the manufacturing index to rise marginally to 57 in November. The index was at 54.4 in September, 56.3 in August, 55.5 in July, and 56.2 in June.
In November, the closely-watched new orders component -- a measure of future demand -- declined 2.3 points to 56.6. The production component fell 7.7 points to 55 , and the employment component dipped 0.2 point to 57.5.
The inventories component, however, rose 2.8 points to 56.7 in November.
Exports Continue To Support Factory Expansion
Norbert J. Ore, chairman of the ISM's Manufacturing Business Survey Committee, said exports remain a large factor in the manufacturing expansion, but companies are starting to express some concern about price pressure.
"With the PMI at 56.6%, November's rate of growth is the second fastest in the last six months. Exports and imports continue to support expansion in the sector. Prices moderated slightly during the month, but comments from the respondents express concerns with regard to pricing pressures," Ore said in a statement. "The list of commodities in short supply increased, though short supply items are not yet posing significant problems. Manufacturing continues to benefit from the recovery in autos, but those industries reliant upon housing continue to struggle."
Respondents' comments in the November survey confirmed an industrial sector that seeing strong international demand, but only modest domestic business.
"Business continues to improve; however, rising material prices are eroding margin. Increases to the consumer are inevitable in early Q1 2011" (paper products sector).
"International markets expanding rapidly. Domestic market is slowly rebounding" (transportation equipment sector).
"Capital projects are being released, which is improving our sales" (computer and electronics products sector).
"We're starting to see capacity at suppliers become an issue" (machinery sector).
"We are seeing increases in chemical prices that seem to be driven by supply/demand imbalance" (chemical products sector).
The Missing Element: Strong Domestic Demand
What's needed now is for domestic demand to rev up -- which would lead to more hiring and increased U.S. GDP growth -- two areas where the economy is still underperforming -- and also drive earnings higher.