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posted on 01 December 2017

November 2017 Manufacturing Survey Growth Remains In Expansion

Written by Steven Hansen

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

Analyst Opinion of the ISM Manufacturing Survey

Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed's Industrial Production index growth rate to modestly decline. 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 53.8 to 54.9 54.5 53.9
ISM Manufacturing 57.5 to 59.5 58.4 58.2

From the Markit PMI Manufacturing Index:

Operating conditions improve at quickest rate for nine months

  • PMI at 53.9 in November
  • Production and new orders increase solidly
  • Output prices raised to greatest extent since December 2013
  • November survey data indicated improved operating conditions across the US manufacturing sector. The upturn was supported by solid, albeit slightly weaker, increases in output and new orders. Staffing levels meanwhile rose at a robust pace, despite the rate of job creation softening since October. However, signs of capacity pressures persisted, with backlogs of work rising again. Output charges rose at the fastest pace since December 2013. Input prices also rose at a quicker rate that was steep overall. Business confidence was robust, and reached its highest since January 2016.
  • The seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers' Index™ (PMI™) registered 53.9 in November, down from 54.6 in October. The latest index reading signalled robust, albeit slower, overall growth in the manufacturing sector. The latest upturn was in line with the long-run series average.

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 November, and the overall economy grew for the 102nd 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 November PMI® registered 58.2 percent, a decrease of 0.5 percentage point from the October reading of 58.7 percent. The New Orders Index registered 64 percent, an increase of 0.6 percentage point from the October reading of 63.4 percent. The Production Index registered 63.9 percent, a 2.9 percentage point increase compared to the October reading of 61 percent. The Employment Index registered 59.7 percent, a decrease of 0.1 percentage point from the October reading of 59.8 percent. The Supplier Deliveries Index registered 56.5 percent, a 4.9 percentage point decrease from the October reading of 61.4 percent. The Inventories Index registered 47 percent, a decrease of 1 percentage point from the October reading of 48 percent. The Prices Index registered 65.5 percent in November, a 3 percentage point decrease from the October level of 68.5, indicating higher raw materials prices for the 21st consecutive month. Comments from the panel reflect expanding business conditions, with New Orders and Production leading gains, employment expanding at a slower rate, order backlogs stable and expanding, and export orders all continuing to grow in November. Supplier deliveries continued to slow (improving), but at slower rates, and inventories continued to contract during the period. Price increases continued, but at a slower rate. The Customers' Inventories Index improved but remains at low levels."

Of the 18 manufacturing industries, 14 reported growth in November, in the following order: Paper Products; Machinery; Transportation Equipment; Computer & Electronic Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Chemical Products; Furniture & Related Products; Fabricated Metal Products; Miscellaneous Manufacturing; and Primary Metals. Two industries reported contraction during the period: Wood Products; and Petroleum & Coal 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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