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posted on 02 May 2016

April 2016 ISM Manufacturing Survey Declined But Remained In Expansion.

Written by Steven Hansen

The ISM Manufacturing survey is in expansion for the second month after 5 months in contraction - however it declined and is barely positive. The key internals likewise declined and remained positive. The PMI manufacturing Index, also released today, is exactly at the same level..

The ISM Manufacturing survey index (PMI) marginally declined from 51.8 to 50.8 (50 separates manufacturing contraction and expansion). This was at expectations which were 49.5 to 52.5 (consensus 51.5).

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

The regional Fed manufacturing surveys indicated some growth in March, and now the ISM indicates manufacturing shows expansion also.

Released On 5/2/2016 9:45:00 AM For Apr, 2016
Prior Consensus Consensus Range Actual
Level 51.5 51.0 50.5 to 51.0 50.8

The manufacturing sector has started out the second quarter completely flat, based at least on the April PMI which fell 7 tenths to 50.8. New orders did rise modestly in the month but that's the only good news in the report. Export orders, contracting at the fastest pace in more than a year, are not showing any lift yet from the lower dollar. And higher oil prices are not helping capital spending in the energy sector which remains a major negative for the sample. Output is flat, backlog orders are in contraction for a third straight month, and employment has completely stalled. And manufacturers continue to work down inventories as much as possible. Prices for raw materials, reflecting higher costs for oil-related products, did rise but not selling prices which are decreasing further. This report isn't closely watched but the ISM manufacturing report is, and similar results for ISM, which will be posted at 10:00 a.m. ET, could shake the U.S. outlook and perhaps global markets with it.

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

The noisy Backlog of Orders declined but remains in in expansion. 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 expanded in April for the second consecutive month, while the overall economy grew for the 83rd consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

"The April PMI® registered 50.8 percent, a decrease of 1 percentage point from the March reading of 51.8 percent. The New Orders Index registered 55.8 percent, a decrease of 2.5 percentage points from the March reading of 58.3 percent. The Production Index registered 54.2 percent, 1.1 percentage points lower than the March reading of 55.3 percent. The Employment Index registered 49.2 percent, 1.1 percentage points above the March reading of 48.1 percent. Inventories of raw materials registered 45.5 percent, a decrease of 1.5 percentage points from the March reading of 47 percent. The Prices Index registered 59 percent, an increase of 7.5 percentage points from the March reading of 51.5 percent, indicating higher raw materials prices for the second consecutive month. Manufacturing registered growth in April for the second consecutive month, as 15 of our 18 industries reported an increase in new orders in April (up from 13 in March), and 15 of our 18 industries reported an increase in production in April (up from 12 in March)."

Of the 18 manufacturing industries, 11 are reporting growth in April in the following order: Wood Products; Printing & Related Support Activities; Paper Products; Plastics & Rubber Products; Primary Metals; Fabricated Metal Products; Chemical Products; Machinery; Computer & Electronic Products; Nonmetallic Mineral Products; and Food, Beverage & Tobacco Products. The four industries reporting contraction in April are: Petroleum & Coal Products; Transportation Equipment; Miscellaneous Manufacturing; and Furniture & Related 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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