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posted on 01 February 2017

January 2017 ISM Manufacturing Survey Improved

Written by Steven Hansen

The ISM Manufacturing survey improved and remained in expansion. The key internals remain mixed but improved. The Markit PMI manufacturing Index, also released today, is in positive territory and improved.

Analyst Opinion of the ISM Manufacturing Survey

ISM manufacturing index movements have correlated with Industrial Production Manufacturing index only half the time in the last 12 months. Based on this survey and the unusually unified district Federal Reserve Surveys (all in expansion, one would expect the Fed's Industrial Production index to be improved in Janurary. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession..Note that new orders sub-index insignificantly improved.

The ISM Manufacturing survey index (PMI) marginally improved from 54.5 to 56.0 (50 separates manufacturing contraction and expansion). This was slightly above expectations from Bloomberg / Econoday which were 54.0 to 56.8 (consensus 55.0).

Earlier today, the Markit PMI Manufacturing Index was released:

Strongest manufacturing production growth for almost two years

  • Robust expansion of output volumes at the start of 2017
  • New order growth accelerates to a 28-month high
  • Fastest rise in input costs since September 2014
  • US manufacturers signalled a strong start to 2017, with both output and new order growth accelerating since the end of last year. Improving business conditions were also reflecting in a sustained upturn in payroll numbers and the steepest rise in stocks of finished goods since the index began in 2007. Meanwhile, manufacturers reported that confidence regarding the year-ahead business outlook was the strongest since March 2016, which was mainly linked to hopes of a continued upturn in domestic economic conditions.
  • At 55.0 in January, up from 54.3 in December, the seasonally adjusted Markit final US Manufacturing Purchasing Managers' Index™ (PMI™) signalled a robust and accelerated improvement in overall business conditions across the manufacturing sector. The latest reading was little changed from the earlier 'flash' reading of 55.1 and pointed to the fastest upturn in manufacturing performance since March 2015. All five index components exerted a positive influence in the headline PMI in January, led by the sharpest expansion of incoming new work for over two years.

z markit_pmi.PNG

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

The noisy Backlog of Orders was unchanged and remans 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 expanded in January, and the overall economy grew for the 92nd consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee; "The January PMI® registered 56 percent, an increase of 1.5 percentage points from the seasonally adjusted December reading of 54.5 percent. The New Orders Index registered 60.4 percent, an increase of 0.1 percentage point from the seasonally adjusted December reading of 60.3 percent. The Production Index registered 61.4 percent, 2 percentage points higher than the seasonally adjusted December reading of 59.4 percent. The Employment Index registered 56.1 percent, an increase of 3.3 percentage points from the seasonally adjusted December reading of 52.8 percent. Inventories of raw materials registered 48.5 percent, an increase of 1.5 percentage points from the December reading of 47 percent. The Prices Index registered 69 percent in January, an increase of 3.5 percentage points from the December reading of 65.5 percent, indicating higher raw materials prices for the 11th consecutive month. The PMI®, New Orders, and Production Indexes all registered their highest levels since November of 2014, and comments from the panel are generally positive regarding demand levels and business conditions."

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


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.

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).

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 jobs growth.

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

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