June 2014 ISM Manufacturing Survey Insignificantly Falls – Expansion Continues

Written by Steven Hansen

The ISM Manufacturing survey for June 2014 continues to indicate manufacturing growth expansion with an insignificant decline. 

The ISM Manufacturing survey index (PMI) fell insignificantly from 55.4 to 55.3 (50 separates manufacturing contraction and expansion). This was within expectations which were 54.8 to 57.0 (consensus 55.6).

This index had been in a general downtrend since mid 2011. This is the thirteenth month of expansion. The regional Fed manufacturing surveys were indicating growth in June, and now the ISM indicates manufacturing shows expansion in June also.

Relatively deep penetration of this index below 50 has normally resulted in a recession.

The noisy Backlog of Orders degraded from 52.5 to 48.0 – but still is showing growth. 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.

Excepts from the ISM release:

Economic activity in the manufacturing sector expanded in June for the 13th consecutive month, and the overall economy grew for the 61st consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

“The June PMI® registered 55.3 percent, a decrease of 0.1 percentage point from May’s reading of 55.4 percent, indicating expansion in manufacturing for the 13th consecutive month. The New Orders Index registered 58.9 percent, an increase of 2 percentage points from the 56.9 percent reading in May, indicating growth in new orders for the 13th consecutive month. The Production Index registered 60 percent, 1 percentage point below the May reading of 61 percent. Employment grew for the 12th consecutive month, registering 52.8 percent, the same level of growth as reported in May. Inventories of raw materials remained at 53 percent, the same reading as reported in both May and April. The price of raw materials grew at a slower rate in June, registering 58 percent, down 2 percentage points from May.”

Of the 18 manufacturing industries, 15 are reporting growth in June in the following order: Furniture & Related Products; Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Machinery; Fabricated Metal Products; Computer & Electronic Products; Transportation Equipment; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Wood Products; Printing & Related Support Activities; Petroleum & Coal Products; Primary Metals; and Paper Products. The three industries reporting contraction in June are: Textile Mills; Chemical Products; and Plastics & Rubber Products.

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.

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 (blue bar) and US Census manufacturing shipments (red bar) to the ISM Manufacturing Survey (purple bar).

Comparing Surveys to Hard Data

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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 jobsgrowth. 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.

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