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ISM Manufacturing Survey Has Seasonal Issues In March 2011

Econintersect is not a fan of surveys – especially the Institute for Supply Management (ISM )who have a terrible track record of consistency.  The March 2011 survey on the surface only suffered a small decline from 61.4 to 61.2 – which still is indicating moderate growth.

But under the headline number is two important sub-numbers that are concerning: new orders and backlog.  First the headlines:

“The recent trend of rapid growth in the manufacturing sector continued in March, as the PMI registered above 60 percent for the third consecutive month. The component indexes of the PMI remain at very positive levels and signal strong sector performance in the first quarter. While manufacturers are benefiting from strength in new orders and production, there is significant concern with regard to commodity prices. Many manufacturers indicate the prices they have to pay for inputs are rising, and there is concern about the impact of higher prices on their margins.”

Econintersect monitors new orders and backlog as they are the primary indicator where we are economically.  Sharp changes in these components raises eyebrows.  In all cases the ISM is still indicating growth.  Is the ISM seeing something that is yet to creep into the hard data?

Sharp movements causes concern.  For new orders, here is the background narrative:

The 14 industries reporting growth in new orders in March — listed in order — are: Apparel, Leather & Allied Products; Furniture & Related Products; Transportation Equipment; Fabricated Metal Products; Textile Mills; Paper Products; Printing & Related Support Activities; Miscellaneous Manufacturing; Petroleum & Coal Products; Computer & Electronic Products; Chemical Products; Machinery; Electrical Equipment, Appliances & Components; and Food, Beverage & Tobacco Products. The two industries reporting decreases in new orders in March are: Wood Products and Primary Metals.

New
Orders
%
Better
%
Same
%
Worse
Net Index
Mar 2011 43 47 10 +33 63.3
Feb 2011 43 46 11 +32 68.0
Jan 2011 46 36 18 +28 67.8
Dec 2010 31 47 22 +9 62.0

When you look at new orders – the percentage of users seeing things better, the same or worse actually changed little – the problem is a seasonal adjustment factor.

The same is true for backlog:

The eight industries reporting increased order backlogs in March — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Nonmetallic Mineral Products; Furniture & Related Products; Machinery; Miscellaneous Manufacturing; and Fabricated Metal Products. The five industries reporting decreases in order backlogs during March are: Wood Products; Printing & Related Support Activities; Transportation Equipment; Chemical Products; and Electrical Equipment, Appliances & Components.

Backlog of
Orders
%
Reporting
%
Greater
%
Same
%
Less
Net Index
Mar 2011 85 26 53 21 +5 52.5
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

There is little variation in backlog in manufacturing seasonally.  It appears all is well in the ISM survey – the seasonal adjust methodology is wrong.

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