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posted on 03 August 2015

July 2015 ISM Manufacturing Survey Marginally Declined But Remains in Expansion

Written by Steven Hansen

The ISM Manufacturing survey continues to indicate manufacturing growth expansion - marginally declined this month. The key internal new orders modestly improved and remains in expansion. Backlog of orders contraction grew..

The ISM Manufacturing survey index (PMI) was marginally improved from 53.5 to 52.7 (50 separates manufacturing contraction and expansion). This was slightly below expectations which were 53.0 to 54.5 (consensus 53.7).

Earlier today, the PMI Manufacturing Index was released - from Bloomberg:

Released On 8/3/2015 9:45:00 AM For Jul, 2015
Prior Consensus Consensus Range Actual
Level 53.6 53.8 53.5 to 54.0 53.8

Highlights
Slow growth is the signal from this morning's manufacturing reports including the manufacturing PMI which came in at an as-expected 53.8 for final July. Improving domestic demand gave a boost to new orders as it did in this morning's ISM report while exports orders, unlike the ISM report, are showing a slight bounce back. Still, the report notes that exports are being held down by the strong dollar which is forcing manufacturers to focus their efforts on the domestic market.

Employment in this report is strong for another contrast with the ISM report. Price data in both reports are mute. The early signals from the manufacturing sector, including the run of regional Federal Reserve reports, point in sum to another flat month for manufacturing in July.

This ISM Manufacturing index had been in a general uptrend since mid 2013, the three month trend is now improving. This is the 31st month of expansion. The regional Fed manufacturing surveys indicated little growth or contraction in July, and now the ISM indicates manufacturing shows weak expansion.

Relatively deep penetration of this index below 50 has normally resulted in a recession.

The noisy Backlog of Orders contraction grew. Backlog growth should be an indicator of improving conditions; a number below 50 indicates contraction. Backlog accuracy does not have a high correlation against actual data.

Excepts from the ISM release:

The July PMI® registered 52.7 percent, a decrease of 0.8 percentage point below the June reading of 53.5 percent. The New Orders Index registered 56.5 percent, an increase of 0.5 percentage point from the reading of 56 percent in June. The Production Index registered 56 percent, 2 percentage points above the June reading of 54 percent. The Employment Index registered 52.7 percent, 2.8 percentage points below the June reading of 55.5 percent, reflecting growing employment levels from June but at a slower rate. Inventories of raw materials registered 49.5 percent, a decrease of 3.5 percentage points from the June reading of 53 percent. The Prices Index registered 44 percent, down 5.5 percentage points from the June reading of 49.5 percent, indicating lower raw materials prices for the ninth consecutive month. Comments from the panel reflect a combination of optimism mixed with uncertainties about international markets and the impacts of the continuing decline in oil prices.

Of the 18 manufacturing industries, 11 are reporting growth in July in the following order: Textile Mills; Paper Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Furniture & Related Products; Fabricated Metal Products; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Transportation Equipment; and Miscellaneous Manufacturing. The five industries reporting contraction in July are: Wood Products; Primary Metals; Plastics & Rubber Products; Chemical Products; and Machinery.

It is interesting to note that ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy. Historically, it could be argued that the production portion of ISM Manufacturing leads the Fed's Industrial Production index - however the correlation is not strong when looking at trends.

New orders have direct economic consequences - and improved from 56.0 to 56.5. Expanding new orders is a relatively reliable sign a recession is NOT imminent. However, New Orders contraction have given false recession warnings twice since 2000.

However, holding this and other survey's Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (blue bar) and US Census manufacturing shipments (red bar) to the ISM Manufacturing Survey (purple bar).

Comparing Surveys to Hard Data

z survey1.png

Caveats on the use of ISM Manufacturing Index:

This is a survey, a quantification of opinion - not facts and data. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions.

Many use ISM manufacturing for guidance in estimating manufacturing employment growth. Econintersect has run correlation coefficients for the ISM manufacturing employment and the BLS manufacturing employment data series above going back to 1988, using quarterly data. The coincident correlations are actually negative, but poor (r = -0.2 to -0.4 for various time periods examined). See here for definitions.

Before 2000 the ISM employment data had a weak positive correlation to the BLS data 4 to 7 quarters later (r values above 0.6). Since 2000 the correlations for ISM manufacturing employment as a leading indicator for the BLS manufacturing employment have been between 0 and 0.3 for r (correlation coefficient). These values define correlations as none to poor.

In other words, ISM employment index is not useful in understanding manufacturing jobsgrowth. The graph below shows BLS manufacturing employment month-over-month gains against the ISM Manufacturing employment index.

Indexed to Jan 2000 - Comparison of the ISM Manufacturing Employment Subindex (blue line) to BLS Manufacturing Employment (red line) - all data seasonally adjusted

The ISM employment index appears useful in predicting turning points which can lead the BLS data up to one year.

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