ISM Manufacturing Grew in October

According to the ISM survey of manufacturers (aka purchasing managers), there was strong growth of new orders in October 2009.  The headlines:

“The manufacturing sector grew during October, with both new orders and production making significant gains. Since hitting a peak in April, the trend for manufacturing has been toward slower growth. However, this month’s report signals a continuation of the recovery that began 15 months ago, and its strength raises expectations for growth in the balance of the quarter. Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy.”

The ISM report sticks up like a sore thumb in how positive the survey is reported.  Is it an anomaly, or a forerunner of the next leg up. The ISM survey has one of the weakest methodologies of all surveys as it is not properly weighted between large and small companies.  It does have a history of tracking the equities market, but economically misses turning points.  The bottom line is that the ISM is not an real economic report, but still needs to be analyzed.   Econintersect believes this report has too many unimportant bells and whistles – but the most important elements are new orders and backlog.

The strength of the new orders is surprising.   The statement from the ISM:

……This is the 16th consecutive month of growth in the New Orders Index and the largest month-over-month improvement since January 2009. A New Orders Index above 50.2 percent, over time, is generally consistent with an increase in the Census Bureau’s series on manufacturing orders (in constant 2000 dollars).

The 11 industries reporting growth in new orders in October — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Miscellaneous Manufacturing; Primary Metals; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Machinery; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Transportation Equipment. The five industries reporting contraction in October are: Nonmetallic Mineral Products; Printing & Related Support Activities; Wood Products; Chemical Products; and Furniture & Related Products.

Even my cynical view of the ISM methodology would not ignore that new orders are so strong – even though new orders actually declined in January 2009.

On the other hand, it is always confusing to me when new orders increase dramatically – and backlog does not rise.  If backlog rises, it is a sure sign the economy is growing.  The ISM statement:

The six industries reporting increased order backlogs in October — listed in order — are: Apparel, Leather & Allied Products; Furniture & Related Products; Plastics & Rubber Products; Fabricated Metal Products; Miscellaneous Manufacturing; and Food, Beverage & Tobacco Products. The seven industries reporting decreases in order backlogs during October — listed in order — are: Nonmetallic Mineral Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Chemical Products; Machinery; Transportation Equipment; and Computer & Electronic Products.

Overall, it is suggested we wait until hard data confirms this increase in the ISM survey before the champagne is broken out.

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