CBS Marketwatch reports ISM factory index up in September. Hurricane Katrina sparks higher prices and new orders.

Instead of depressing activity, there was a rush of new orders from manufacturers concerned about losing supplies. In addition, prices shot up as those manufacturers appeared willing to pay top dollar for the goods they needed.

The ISM index rose to 59.4% in September from 53.6% in August. Read full survey. This is the highest level since August 2003 and well outside of expectations.

The consensus forecast of estimates collected by MarketWatch called for the index to slip to 52.1 % in the wake of Katrina. See Economic Calendar.

Economists were cheered by the headline, which they said alleviated some concern about the national impact of the two hurricanes that struck the Gulf Coast in the past two months.

“This data supports the Fed’s view of Katrina,” said Drew Matus, economist at Lehman Brothers.

The Fed said Katrina would only have a near-term impact on growth, and officials have been warning the market that the Fed is committed to hiking rates at a measured pace.

Were those strong ISM numbers for September? The Marketwatch headlines would have you believe so. Mish, is there another explanation? Yes indeed there is and the article mentions it but beats around the bush. I can sum it up in a single word: hoarding. Let’s take a look.

But the ISM said some of the surprising strength might be temporary as it represented a scramble of manufacturers to maintain a steady stream of supplies.

Norbert Ore, chairman of the ISM survey committee, said Katrina sparked new orders as manufacturers sought to lock in materials that they feared might become in short supply. In some instances, manufacturers had to place two or three orders to get their regular supply.

The new orders index rose to 63.8% in September from 56.4% in August. The price index soared to 78% from 62.5%.

Fearing a short supply, factories locked in supplies at soaring prices.

The bond market reaction to these numbers may force yet two more rate hikes out of the FED this year. Consumer sentiment is already in the gutter and consumer sales are slowing. SUV sales are anemic. It is unlikely that additional rate hikes are going to lift consumer sentiment any. The question remains whether or not this hoarding is going to prove warranted based on forthcoming demand. I believe it is not.

Mike Shedlock / Mish