Written by Steven Hansen
The ISM Manufacturing survey for November 2013 showed the expansion again strengthened. The New Orders sub-index which historically correlates to the economy also improved.
The ISM Manufacturing survey index (PMI) rose marginally from 56.4 to 57.3 (50 separates manufacturing contraction and expansion). This was above expectations which were 55.0 to 55.5.
This index had been in a general downtrend since mid 2011. This is the fifth month of expansion after four months of decline. All but one Fed survey and now the ISM shows manufacturing improved in November (an unusual event).
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders rose from 51.5 to 54.0. 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 November for the sixth consecutive month, and the overall economy grew for the 54th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.
“The PMI™ registered 57.3 percent, an increase of 0.9 percentage point from October’s reading of 56.4 percent. The PMI™ has increased progressively each month since June, with November’s reading reflecting the highest PMI™ in 2013. The New Orders Index increased in November by 3 percentage points to 63.6 percent, and the Production Index increased by 2 percentage points to 62.8 percent. The Employment Index registered 56.5 percent, an increase of 3.3 percentage points compared to October’s reading of 53.2 percent. This reflects the highest reading since April 2012 when the Employment Index registered 56.8 percent. With 15 of 18 manufacturing industries reporting growth in November relative to October, the positive growth trend characterizing the second half of 2013 is continuing.”
Of the 18 manufacturing industries, 15 are reporting growth in November in the following order: Plastics & Rubber Products; Textile Mills; Furniture & Related Products; Primary Metals; Food, Beverage & Tobacco Products; Paper Products; Printing & Related Support Activities; Petroleum & Coal Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Transportation Equipment; Chemical Products; Computer & Electronic Products; Nonmetallic Mineral Products; and Fabricated Metal Products. The three industries reporting contraction in November are: Apparel, Leather & Allied Products; Wood 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.