Written by Steven Hansen
The ISM Manufacturing survey for October 2013 showed the expansion again strengthened. The New Orders sub-index which historically correlates to the economy was also marginally better.
The ISM Manufacturing survey index (PMI) rose marginally from 56.2 to 56.4 (50 separates manufacturing contraction and expansion). This was above expectations which were 54.5 to 55.0.
This index has been in a general downtrend since mid 2011. This is the fourth month of expansion after four months of decline. All Fed surveys and now the ISM shows manufacturing improved in October (an unusual event).
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders rose from 49.5 to 51.5. 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 October for the fifth consecutive month, and the overall economy grew for the 53rd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.
“The PMI™ registered 56.4 percent, an increase of 0.2 percentage point from September’s reading of 56.2 percent. The PMI™ has increased progressively each month since June, with October’s reading reflecting the highest PMI™ in 2013. The New Orders Index increased slightly in October by 0.1 percentage point to 60.6 percent, while the Production Index decreased by 1.8 percentage points to 60.8 percent. Both the New Orders and Production Indexes have registered above 60 percent for three consecutive months. The Employment Index registered 53.2 percent, a decrease of 2.2 percentage points compared to September’s reading of 55.4 percent. The panel’s comments are generally positive about the current business climate; however, there are mixed responses on whether the government shutdown and potential default have had any effect on October’s results.”
Of the 18 manufacturing industries, 14 are reporting growth in October in the following order: Textile Mills; Food, Beverage & Tobacco Products; Furniture & Related Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Transportation Equipment; Petroleum & Coal Products; Wood Products; Plastics & Rubber Products; Nonmetallic Mineral Products; Machinery; Paper Products; and Fabricated Metal Products. The four industries reporting contraction in October are: Apparel, Leather & Allied Products; Primary Metals; Chemical Products; and Miscellaneous Manufacturing.
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.