December 2011 ISM Manufacturing Shows Improving Economy

The ISM Manufacturing survey index (PMI) improved from 52.7 to 53.9 in December 2011 (50 separates manufacturing contraction and expansion).   The improvement was better than expected;  the market expected between 53.2 and 53.4.

Econintersect sees the new orders sub-index as having a higher and more precise correlation to recessions and the economy then the PMI – and the new orders sub-index improved strongly this month.

“The PMI registered 53.9 percent, an increase of 1.2 percentage points from November’s reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month’s survey.”

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

It is interesting to note that ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy. Historically, there is little linkage between real employment and the ISM employment index.

New orders have direct economic consequences – IF the opinions are accurate.  Expanding new orders is not a reliable sign a recession is imminent;  New Orders have given false recession warnings twice since 2000.

Based on the new orders component of ISM manufacturing an improving economy is indicated.

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.

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.

Addendum: The graph below shows BLS private non-farm employment month-over-month gains against the ISM Manufacturing employment index.

Related Articles

All Articles on Institute of Supply Management Surveys

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