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posted on 01 June 2016

May 2016 ISM Manufacturing Survey Insignificantly Improved.

Written by Steven Hansen

The ISM Manufacturing survey remained in expansion for the third month after 5 months in contraction - and marginally improved. The key internals declined. The PMI manufacturing Index, also released today, is also barely in positive territory..

The ISM Manufacturing survey index (PMI) marginally declined from 50.8 to 50.8 (50 separates manufacturing contraction and expansion). This was at expectations which were 49.9 to 51.0 (consensus 50.6).

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

Released On 6/1/2016 9:45:00 AM For May, 2016
Prior Consensus Consensus Range Actual
Level 50.8 50.5 50.4 to 51.1 50.7

Markit Economics' U.S. manufacturing sample continues to report nearly dead flat conditions, at a final May index of 50.7 which compares with 50.5 for the mid-month flash and a final 50.8 for April. Production is in outright contraction (below 50) for the first time in 6-1/2 years as growth in new orders is as slow as it's been all year. Export orders posted a marginal drop while total backlog orders are also down. The sample, however, increased hiring in an anomaly that won't likely last given the weakness in orders. Efforts to slow inventory accumulation contributed to the decline in production. Price data include an uptick in input costs, tied in part to higher steel prices, but little change for selling prices which is actually an improvement following three straight months of decline.

Negative factors cited by the sample include weak capital investment across the energy sector, uncertainty related to the presidential election and generally subdued economic conditions. Coming up on the calendar at 10:00 a.m. ET will be the closely watched ISM manufacturing index which forecasters see coming in very close to this report, at a consensus 50.6.

The regional Fed manufacturing surveys where all in contraction, and now the ISM indicates manufacturing shows expansion.

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

The noisy Backlog of Orders declined but returned to 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 expanded in May for the third consecutive month, while the overall economy grew for the 84th consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

The May PMI® registered 51.3 percent, an increase of 0.5 percentage point from the April reading of 50.8 percent. The New Orders Index registered 55.7 percent, a decrease of 0.1 percentage point from the April reading of 55.8 percent. The Production Index registered 52.6 percent, 1.6 percentage points lower than the April reading of 54.2 percent. The Employment Index registered 49.2 percent, the same reading as in April. Inventories of raw materials registered 45 percent, a decrease of 0.5 percentage point from the April reading of 45.5 percent. The Prices Index registered 63.5 percent, an increase of 4.5 percentage points from the April reading of 59 percent, indicating higher raw materials prices for the third consecutive month. Manufacturing registered growth in May for the third consecutive month, as 14 of our 18 industries reported an increase in new orders in May (down from 15 in April), and 12 of our 18 industries reported an increase in production in May (down from 15 in April).

Of the 18 manufacturing industries, 12 are reporting growth in May in the following order: Wood Products; Textile Mills; Printing & Related Support Activities; Fabricated Metal Products; Paper Products; Plastics & Rubber Products; Computer & Electronic Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Food, Beverage & Tobacco Products; Machinery; and Primary Metals. The six industries reporting contraction in May — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Transportation Equipment; Nonmetallic Mineral Products; Chemical Products; 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 marginally declined 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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