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posted on 01 March 2016

February 2016 ISM Manufacturing Survey Remains In Contraction For The Fifth Month In A Row.

Written by Steven Hansen

The ISM Manufacturing survey was in contraction for the fifth month in a row. The key internals were mixed. The PMI manufacturing Index, also released today, is in expansion.

The ISM Manufacturing survey index (PMI) marginally improved from 48.2 to 49.5 (50 separates manufacturing contraction and expansion). This was at expectations which were 47.2 to 49.5 (consensus 48.5).

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

Released On 3/1/2016 9:45:00 AM For Feb, 2016
Prior Consensus Consensus Range Actual
Level 52.4 51.3 51.0 to 51.7 51.3

Highlights
Growth in Markit Economics' manufacturing sample is slowing to a crawl, at 51.3 for final February which is, next only to February's flash of 51.0, the second lowest reading since October 2012. January, at 52.4, was a good month for the manufacturing sector with industrial production up and durable orders up, but the early indications on February are uniformly negative.

Production in this report slowed as did new orders where growth is at a 3-1/2 year low. Export orders fell the most since April last year. Backlog orders are also down and employment growth moderated for a second straight month. Respondents in the sample are citing caution among their customers as a key negative. In a convincing kicker, selling prices are down the most in more than 3-1/2 years.

This report, which runs hot compared to other manufacturing reports, is sitting near recovery lows and is offering its own signal of renewed trouble for manufacturing, a sector that continues to get hit by weak exports and weak energy-related demand.

The regional Fed manufacturing surveys indicated little growth or contraction in February, and now the ISM indicates manufacturing shows contraction.

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

The noisy Backlog of Orders improved but remains in contraction. 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:

Economic activity in the manufacturing sector contracted in February for the fifth consecutive month, while the overall economy grew for the 81st consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

The February PMI® registered 49.5 percent, an increase of 1.3 percentage points from the January reading of 48.2 percent. The New Orders Index registered 51.5 percent, the same reading as in January. The Production Index registered 52.8 percent, 2.6 percentage points higher than the January reading of 50.2 percent. The Employment Index registered 48.5 percent, 2.6 percentage points above the January reading of 45.9 percent. Inventories of raw materials registered 45 percent, an increase of 1.5 percentage points above the January reading of 43.5 percent. The Prices Index registered 38.5 percent, an increase of 5 percentage points above the January reading of 33.5 percent, indicating lower raw materials prices for the 16th consecutive month. Comments from the panel indicate a more positive view of demand than in January, as 12 of our 18 industries report an increase in new orders, while four industries report a decrease in new orders.

Of the 18 manufacturing industries, nine are reporting growth in February in the following order: Textile Mills; Wood Products; Furniture & Related Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Chemical Products; Primary Metals; and Paper Products. The seven industries reporting contraction in February — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Computer & Electronic Products; Printing & Related Support Activities; Transportation Equipment; Plastics & Rubber Products; and Fabricated Metal Products.

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. 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. This month new orders remained unchanged but is sightly in expansion.

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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