May 2014 ISM Manufacturing Survey Improves – At Expectations

Written by Steven Hansen

The ISM Manufacturing survey for May 2014 continues to indicate manufacturing growth expansion with a marginal improvement in the index. The initial release was screwed up – and it indicated growth was down month-over-month.

From the ISM:

ISM® has discovered an error in its software programming for calculating the May 2014 Manufacturing PMI® that was released at 10 a.m. ET this morning.

“We apologize for this error. We have recalculated and confirmed that the actual index indicates that the economy is accelerating,” said Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management® (ISM® ) Manufacturing Business Survey Committee. “Our research team is analyzing our internal processes to ensure that this doesn’t happen again,” he added.

“The May PMI® registered 55.4 percent, an increase of 0.5 percentage point from April’s reading of 54.9 percent, indicating expansion in manufacturing for the 12th consecutive month. The New Orders Index registered 56.9 percent, an increase of 1.8 percentage points from the 55.1 percent reading in April, indicating growth in new orders for the 12th consecutive month. The Production Index registered 61.0 percent, 5.3 percentage points above the April reading of 55.7 percent. Employment grew for the 11th consecutive month, registering 52.8 percent, a decrease of 1.9 percentage points below April’s reading of 54.7 percent. The Supplier Deliveries Index registered 53.2 percent, 2.7 percentage points below the April reading of 55.9 percent. Comments from the panel reflect generally steady growth, but note some areas of concern regarding raw materials pricing and supply tightness and shortages.”

The Manufacturing Report on Business® can be traced back to the start of the survey in 1923 and since then it has become a reliable planning tool for businesses and governments. “We are committed to maintaining the integrity of this report,” Holcomb said.

The error resulted when the software incorrectly used the seasonal adjustment factor from the previous month.

The ISM Manufacturing survey index (PMI) rose marginally from 54.9 to 55.4 (50 separates manufacturing contraction and expansion). This was at expectations which were 54.6 to 56.6 (consensus 55.5).

Please note that the rest of this post is using the first released information – the ISM has not released the revised tables.

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

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

The noisy Backlog of Orders degraded from 55.5 to 52.5 – 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 May for the 12th consecutive month, and the overall economy grew for the 60th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.

“The May PMI® registered 53.2 percent, a decrease of 1.7 percentage points from April’s reading of 54.9 percent, indicating expansion in manufacturing for the 12th consecutive month. The New Orders Index registered 53.3 percent, a decrease of 1.8 percentage points from the 55.1 percent reading in April, indicating growth in new orders for the 12th consecutive month. The Production Index registered 55.2 percent, 0.5 percentage point below the April reading of 55.7 percent. Employment grew for the 11th consecutive month, registering 51.9 percent, a decrease of 2.8 percentage points below April’s reading of 54.7 percent. Comments from the panel reflect generally steady growth, but note some areas of concern regarding raw materials pricing and supply tightness and shortages.”

Of the 18 manufacturing industries, 17 are reporting growth in May in the following order: Furniture & Related Products; Electrical Equipment, Appliances & Components; Primary Metals; Fabricated Metal Products; Nonmetallic Mineral Products; Machinery; Transportation Equipment; Chemical Products; Paper Products; Computer & Electronic Products; Petroleum & Coal Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; Wood Products; Miscellaneous Manufacturing; and Plastics & Rubber Products. No industry reported contraction in May.

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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