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posted on 01 September 2017

August 2017 Manufacturing Survey Growth Remains In Expansion

Written by Steven Hansen

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

Analyst Opinion of the ISM Manufacturing Survey

ISM manufacturing index and Markit PMI movements have correlated with Industrial Production Manufacturing index only half the time in the last 12 months. Based on these surveys and the weak district Federal Reserve Surveys, one would expect the Fed's Industrial Production index to be little changed. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession.

From Bloomberg / Econoday:

Consensus Range Consensus Actual
Markit Manufacturing --- --- 52.8
ISM Manufacturing 56.5 to 57.5 56.6 58.8

From the Markit PMI Manufacturing Index:

Manufacturing output expands at weakest pace since June 2016

  • Production rises at modest pace
  • Exports drag on order book growth
  • Employment increases at strongest pace in six months
  • August's PMI reading signalled a further improvement in operating conditions among US manufacturing firms. The upturn was partly driven by an increase in new orders. In line with rising client demand, workforce numbers grew at the fastest pace in six months. However, production levels increased at the weakest rate since June 2016. As a result, the level of outstanding business rose for the first time since April. Inflationary pressures intensified, with input prices and output charges both rising at faster rates. Business confidence remained robust, but softened slightly since July.
  • The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers' Index™ (PMI™) registered 52.8 in August, down slightly from July's reading of 53.3. Nonetheless, the latest index figure signalled an ongoing improvement in operating conditions across the US manufacturing sector.

z markit_pmi.PNG

From the Institute of Supply Management report:

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

The noisy Backlog of Orders declined 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 August, and the overall economy grew for the 99th consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: "The August PMI® registered 58.8 percent, an increase of 2.5 percentage points from the July reading of 56.3 percent. The New Orders Index registered 60.3 percent, a decrease of 0.1 percentage point from the July reading of 60.4 percent. The Production Index registered 61 percent, a 0.4 percentage point increase compared to the July reading of 60.6 percent. The Employment Index registered 59.9 percent, an increase of 4.7 percentage points from the July reading of 55.2 percent. The Supplier Deliveries Index registered 57.1 percent, a 1.7 percentage point increase from the July reading of 55.4 percent. The Inventories Index registered 55.5 percent, an increase of 5.5 percentage points from the July reading of 50 percent. The Prices Index registered 62 percent in August, the same reading as July, indicating higher raw materials' prices for the 18th consecutive month. Comments from the panel reflect expanding business conditions, with new orders, production, employment, backlog and exports all growing in August, as well as supplier deliveries slowing (improving) and inventories increasing during the period. The Customers' Inventories Index experienced a sharp decline in August compared to July."

Of the 18 manufacturing industries, 14 reported growth in August, in the following order: Textile Mills; Petroleum & Coal Products; Machinery; Transportation Equipment; Fabricated Metal Products; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Chemical Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Printing & Related Support Activities; and Food, Beverage & Tobacco Products. Three industries reported contraction in August compared to July: Apparel, Leather & Allied Products; Primary Metals; and Furniture & Related Products.

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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