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posted on 03 April 2017

March 2017 ISM Manufacturing Survey Growth Marginally Slowed

Written by Steven Hansen

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

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 February. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession..Note that new orders and backlog sub-indicies significantly improved.

The ISM Manufacturing survey index (PMI) marginally declined from 57.7 to 57.2 (50 separates manufacturing contraction and expansion). This was slightly at expectations from Bloomberg / Econoday which were 56.0 to 58.5 (consensus 57.1).

Earlier today, the Markit PMI Manufacturing Index was released:

Manufacturing growth slows to six-month low in March

  • Headline PMI eases to 53.3, down from 54.2 in February
  • New orders rise at weakest pace since October 2016
  • Input cost inflation hits two-and-a-half year high
  • Business conditions continued to improve across the manufacturing sector in March, but the latest upturn was the weakest recorded for six months. The loss of momentum reflected softer rates of output and new order growth, alongside a slower rise in payroll numbers. Manufacturers sought to adjust their inventory strategies in response to more subdued sales growth, with stocks of finished goods reduced for the first time in six months.
  • Meanwhile, higher raw material prices resulted in the strongest rate of cost inflation since September 2014. Factory gate charges also increased at the fastest pace for around two-and-a-half years. At 53.3 in March, down from 54.2 in February, the seasonally adjusted Markit final US Manufacturing Purchasing Managers' Index™ (PMI™) eased further from the 22-month peak recorded at the start of 2017 (55.0). The latest reading was the lowest since September 2016.

z markit_pmi.PNG

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

The noisy Backlog of Orders improved and remains 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 March, and the overall economy grew for the 94th 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 March PMI® registered 57.2 percent, a decrease of 0.5 percentage point from the February reading of 57.7 percent. The New Orders Index registered 64.5 percent, a decrease of 0.6 percentage point from the February reading of 65.1 percent. The Production Index registered 57.6 percent, 5.3 percentage points lower than the February reading of 62.9 percent. The Employment Index registered 58.9 percent, an increase of 4.7 percentage points from the February reading of 54.2 percent. Inventories of raw materials registered 49 percent, a decrease of 2.5 percentage points from the February reading of 51.5 percent. The Prices Index registered 70.5 percent in March, an increase of 2.5 percentage points from the February reading of 68 percent, indicating higher raw materials prices for the 13th consecutive month. Consistent with generally positive comments from the panel, all 18 industries reported growth in new orders for the month of March."

Of the 18 manufacturing industries, 17 reported growth in March in the following order: Electrical Equipment, Appliances & Components; Printing & Related Support Activities; Furniture & Related Products; Textile Mills; Machinery; Primary Metals; Miscellaneous Manufacturing; Wood Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Paper Products; Transportation Equipment; Chemical Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Fabricated Metal Products; and Petroleum & Coal Products. No industry reported contraction in March compared to February.

z%20ism_mfg.png

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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