Written by Steven Hansen
The ISM Manufacturing survey for March 2013 continued in expansion territory for the fourth month in a row – however, the rate of growth fell and only marginally in expansion. The sub-index which historically correlates to the economy expansion – but now barely.
The ISM Manufacturing survey index (PMI) fell from 54.2 to 51.3 (50 separates manufacturing contraction and expansion). This was well below expectations which were between 54.0 and 54.5.
This index has been in a general downtrend since mid 2011 – and the January data was suggesting the downward trend is ending. The February data being weak suggests no trend is currently in play.
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders also fell – from 55.0 to 51.0. 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.
Economic activity in the manufacturing sector expanded in March for the fourth consecutive month, and the overall economy grew for the 46th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.
The PMI™ registered 51.3 percent, a decrease of 2.9 percentage points from February’s reading of 54.2 percent, indicating expansion in manufacturing for the fourth consecutive month, but at a slower rate. Both the New Orders and Production Indexes reflected growth in March compared to February, albeit at slower rates, registering 51.4 and 52.2 percent, respectively. The Employment Index registered 54.2, an increase of 1.6 percentage points compared to February’s reading of 52.6 percent. The Prices Index decreased 7 percentage points to 54.5, and the list of commodities up in price reflected far fewer items than in February. In addition, the Backlog of Orders, Exports and Imports Indexes all grew in March.
Of the 18 manufacturing industries, 14 are reporting growth in March in the following order: Wood Products; Furniture & Related Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Paper Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Nonmetallic Mineral Products; Computer & Electronic Products; Transportation Equipment; Printing & Related Support Activities; Primary Metals; and Food, Beverage & Tobacco Products. The three industries reporting contraction in March are: Petroleum & Coal Products; Chemical Products; and Machinery.
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.