ISM Manufacturing Survey Implies Manufacturing Improvement Continues

The Institute for Supply Management released their February 2011 survey results for the manufacturing sector showing it expanded for the 19th consecutive month.

“February’s report from the manufacturing sector indicates continuing strong performance as the PMI registered 61.4 percent, a level last achieved in May 2004. New orders and production, driven by strength in exports in particular, continue to drive the composite index (PMI). New orders are growing significantly faster than inventories, and the Customers’ Inventories Index indicates supply chain inventories will require continuing replenishment. The Employment Index is above 60 percent for only the third time in the last decade. While there are many positive indicators, there is also concern as industries related to housing continue to struggle and the Prices Index indicates significant inflation of raw material costs across many commodities.”

PERFORMANCE BY INDUSTRY -Of the 18 manufacturing industries, 14 are reporting growth in February, in the following order: Apparel, Leather & Allied Products; Petroleum & Coal Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Machinery; Chemical Products; Fabricated Metal Products; Computer & Electronic Products; Textile Mills; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Paper Products; Wood Products; and Miscellaneous Manufacturing. The four industries reporting contraction in February are: Plastics & Rubber Products; Primary Metals; Nonmetallic Mineral Products; and Furniture & Related Products.

I am not a fan of this survey as they have no demonstrated correlation to industrial production (analysis here) as many believe.   Some pundits believe there is some correlation to the equities market.

There has been only real correlation to the equities market in the last two years – but all indexes including gold, oil, and the debt have been going up for the last two years.

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.

New Orders:

The 13 industries reporting growth in new orders in February — listed in order — are: Apparel, Leather & Allied Products; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Wood Products; Printing & Related Support Activities; Machinery; Transportation Equipment; Chemical Products; Paper Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Miscellaneous Manufacturing. The four industries reporting decreases in new orders in February are: Primary Metals; Nonmetallic Mineral Products; Furniture & Related Products; and Plastics & Rubber Products.

New
Orders
%
Better
%
Same
%
Worse
Net Index
Feb 2011 43 46 11 +32 68.0
Jan 2011 46 36 18 +28 67.8
Dec 2010 31 47 22 +9 62.0
Nov 2010 30 45 25 +5 59.6

Backlog:

The 10 industries reporting increased order backlogs in February — listed in order — are: Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Paper Products; Printing & Related Support Activities; Fabricated Metal Products; Machinery; Miscellaneous Manufacturing; Transportation Equipment; Chemical Products; and Computer & Electronic Products. The two industries reporting decreases in order backlogs during February are: Furniture & Related Products; and Plastics & Rubber Products.

Backlog of
Orders
%
Reporting
%
Greater
%
Same
%
Less
Net Index
Feb 2011 82 31 56 13 +18 59.0
Jan 2011 83 34 48 18 +16 58.0
Dec 2010 84 21 52 27 -6 47.0
Nov 2010 89 18 56 26 -8 46.0

Overall, the hard data is confirming what the ISM manufacturing survey has been saying.  Econintersect’s own forecast (analysis here) is calling moderate growth in the month of March.

The economy is expanding.

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