The ISM Manufacturing survey index (PMI) improved from 53.1 (downwardly revised from 53.9) to 54.1 in January 2012 (50 separates manufacturing contraction and expansion). The improvement was disappointing to the market which expected between 54.5 and 55.0.
Econintersect sees the new orders sub-index as having a higher and more precise correlation to recessions and the economy then the PMI overall – and the new orders sub-index was one of the strongest components of expansion this month. Even the noisy Backlog of Orders rose strongly into expansion territory this month (backlog growth is an indicator of improving conditions).
“The PMI registered 54.1 percent, an increase of 1 percentage point from December’s seasonally adjusted reading of 53.1 percent, indicating expansion in the manufacturing sector for the 30th consecutive month. The New Orders Index increased 2.8 percentage points from December’s seasonally adjusted reading to 57.6 percent, reflecting the 33rd consecutive month of growth in new orders. Prices of raw materials increased for the first time in the last four months. Manufacturing is starting out the year on a positive note, with new orders, production and employment all growing in January.”
PERFORMANCE BY INDUSTRY – Of the 18 manufacturing industries, nine are reporting growth in January, in the following order: Apparel, Leather & Allied Products; Petroleum & Coal Products; Machinery; Computer & Electronic Products; Transportation Equipment; Miscellaneous Manufacturing; Fabricated Metal Products; Paper Products; and Primary Metals. The seven industries reporting contraction in January — listed in order — are: Plastics & Rubber Products; Furniture & Related Products; Wood Products; Chemical Products; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; and Textile Mills.
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. Expanding new orders is a relatively reliable sign a recession is imminent. However, New Orders have given false recession warnings twice since 2000.
Based on the new orders component of ISM manufacturing an improving economy is indicated. For those disappointed, I suggest they get over it. Things are improving.
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 graph below shows BLS manufacturing employment month-over-month gains against the ISM Manufacturing employment index.
The ISM employment index was right in predicting the direction of monthly manufacturing employment growth in 2011 about half the time.