Institute for Supply Management (ISM) surveys by their very nature are noisy (month-to-month volatility). When the associated hard data is released, seldom are large changes reflected. Last month, the ISM data (analysis here) stood out amongst other surveys as indicating there was strong growth occurring.
Industrial production hard data released in the interim showed manufacturing was actually flat. Surveys are normally completed by administrative assistants, and are colored by the personal feelings of the form fillers. ISM surveys (aka Purchasing Managers) may or may not be in the business knowledge loop in the first place.
The November 2010 ISM Manufacturing ISM Report On Business® survey results this month remain optimistic. The headlines:
Economic activity in the manufacturing sector expanded in November for the 16th consecutive month, and the overall economy grew for the 19th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.
The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The manufacturing sector grew during November, with both new orders and production continuing to expand. With the PMI at 56.6 percent, November’s rate of growth is the second fastest in the last six months. Exports and imports continue to support expansion in the sector. Prices moderated slightly during the month, but comments from the respondents express concerns with regard to pricing pressures. The list of commodities in short supply increased, though short supply items are not yet posing significant problems. Manufacturing continues to benefit from the recovery in autos, but those industries reliant upon housing continue to struggle.”
The ISM reports have too many bells and whistles if your intent is to understand the economy. The critical elements are new orders and backlog of orders. With new orders, you can understand whether the Purchasing Manager believes the order booking ledger is improving over the previous month. With backlog, you can understand if orders are coming in fast enough to support existing capacity.
While showing positive growth, the percentage of Purchasing Managers believing new orders were growing dropped back to August levels. This is one of the more noisy elements of the ISM manufacturing index. Some of the commentary from the headlines:
The nine industries reporting growth in new orders in November — listed in order — are: Petroleum & Coal Products; Transportation Equipment; Primary Metals; Computer & Electronic Products; Plastics & Rubber Products; Fabricated Metal Products; Machinery; Chemical Products; and Electrical Equipment, Appliances & Components. The six industries reporting decreases in new orders in November — listed in order — are: Printing & Related Support Activities; Food, Beverage & Tobacco Products; Furniture & Related Products; Miscellaneous Manufacturing; Paper Products; and Nonmetallic Mineral Products.
This is a less noisy component of the ISM Manufacturing Index. The consensus is that backlog is contracting, and hard data so far has been supporting this view. Commentary from the headlines:
The four industries reporting increased order backlogs in November are: Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Computer & Electronic Products; and Transportation Equipment. The nine industries reporting decreases in order backlogs during November — listed in order — are: Printing & Related Support Activities; Paper Products; Furniture & Related Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Chemical Products; Miscellaneous Manufacturing; Machinery; and Fabricated Metal Products.
The Purchasing Managers believe orders are not coming in fast enough. Econintersect believes this will eventually lead to additional optimization (read as “layoffs”) as backlog cannot indefinitely contract.