US factories speed up as Europe and China slow

What happened

The Institute for Supply Management's monthly survey of US manufacturers rose to 55.5 in October from 54.5 in September, it said on 2 November. Like other purchasing managers' indices, a reading above 50 means more firms report growth than decline. Production rose to 59.0 from 56.7, new orders held at 55.5, and inventories started to build again. Twelve industries reported growth and three a contraction.

The prices index, which measures how many firms are paying more for materials, eased to 75.2 from 77.9. That is still a very high reading: well above 50, it means far more firms are paying more than are paying less.

Why US factories are moving differently

One likely source of strength is investment in artificial intelligence: data centres need servers, power equipment, cooling and construction materials, and US business investment rose 12.7% at an annual rate in the third quarter. Imports also rose, a sign some of that demand goes to factories abroad, such as South Korea's chipmakers. Europe and China face weaker demand: the euro-area business survey slowed in October, and China's official factory index fell below 50.

Why the prices index matters for inflation

When factories pay more for inputs, some of that cost is passed on to the prices of finished goods months later. A prices index this high usually comes with rising goods inflation. Part of it comes from oil, which jumped in October before falling sharply on 2 November, so the next readings will show how much was temporary.

Where it sits in the chain

This is Link 5, the real economy, feeding back into Link 1: strong demand plus rising costs is the mix that keeps inflation high, and with it the case for a Federal Reserve rate rise in December.

What to watch

• The ISM services survey on 4 November.
• The US jobs report on 6 November.
• Whether the prices index falls in November if oil stays lower.