Written by Steven Hansen
The ISM Manufacturing survey for January 2013 continued rising in expansion territory for the second month in a row. The sub-index which historically correlates to the economy barely shows expansion – and is up strongly.
The ISM Manufacturing survey index (PMI) rose from 50.2 to 53.1 (50 separates manufacturing contraction and expansion). This was well above expectations which were between 49.5 and 50.5.
This index has been in a general downtrend since mid 2011 – however, the January data may be suggesting the downward trend is ending.
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders fell one point to 47.5 and remains in contraction territory. Backlog growth is an indicator of improving conditions; a number below 50 indicates contraction. Backlog accuracy does not have a high correlation against actual data (although the last few month’s declines are proving marginally accurate).
Economic activity in the manufacturing sector expanded in January for the second consecutive month, and the overall economy grew for the 44th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.
The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The PMI™ registered 53.1 percent, an increase of 2.9 percentage points from December’s seasonally adjusted reading of 50.2 percent, indicating expansion in manufacturing for the second consecutive month. The New Orders Index registered 53.3 percent, an increase of 3.6 percent over December’s seasonally adjusted reading of 49.7 percent, indicating growth in new orders. Manufacturing is starting out the year on a positive note, with all five of the PMI™’s component indexes — new orders, production, employment, supplier deliveries and inventories — registering above 50 percent in January.”
Of the 18 manufacturing industries, 13 are reporting growth in January in the following order: Plastics & Rubber Products; Textile Mills; Furniture & Related Products; Printing & Related Support Activities; Apparel, Leather & Allied Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Fabricated Metal Products; Transportation Equipment; Petroleum & Coal Products; Machinery; Primary Metals; and Food, Beverage & Tobacco Products. The four industries reporting contraction in January are: Nonmetallic Mineral Products; Computer & Electronic Products; Wood Products; and Chemical Products.
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.
New orders have direct economic consequences. Expanding new orders is a relatively reliable sign a recession is NOT imminent. However, New Orders contraction have given false recession warnings twice since 2000. This subindex is in a long term downtrend – and remains close to contraction.
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 (dark blue bar) and US Census manufacturing shipments (lighter blue bar) to the ISM Manufacturing Survey (pink bar).
Comparing Surveys to Hard Data
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.
Indexed to Jan 2000 – Comparison of the ISM Manufacturing Employment Subindex (blue line) to BLS Manufacturing Employment (red line) – all data seasonally adjusted
The ISM employment index appears useful in predicting turning points which can lead the BLS data up to one year.