Written by Steven Hansen
The ISM Manufacturing survey for September 2014 continues to indicate manufacturing growth expansion with an moderate decline in the rate of growth. This survey should be considered relatively soft this month, but it is a survey (and not hard data) – and one month is not a trend.
The ISM Manufacturing survey index (PMI) declined from 59.0 to 56.6 (50 separates manufacturing contraction and expansion). This was under expectations which were 57.6 to 58.3 (consensus 58.0).
This index had been in a general uptrend since mid 2013 – but now is trending down. This is the sixteenth month of expansion. The regional Fed manufacturing surveys were indicating growth in September, and now the ISM indicates manufacturing shows expansion in September also.
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders declined from 52.5 to 47.0 – and has now returned to contraction. 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 September for the 16th consecutive month, and the overall economy grew for the 64th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The September PMI® registered 56.6 percent, a decrease of 2.4 percentage points from August’s reading of 59 percent, indicating continued expansion in manufacturing. The New Orders Index registered 60 percent, a decrease of 6.7 percentage points from the 66.7 percent reading in August, indicating growth in new orders for the 16th consecutive month. The Production Index registered 64.6 percent, 0.1 percentage point above the August reading of 64.5 percent. The Employment Index grew for the 15th consecutive month, registering 54.6 percent, a decrease of 3.5 percentage points below the August reading of 58.1 percent. Inventories of raw materials registered 51.5 percent, a decrease of 0.5 percentage point from the August reading of 52 percent, indicating growth in inventories for the second consecutive month. Comments from the panel reflect a generally positive business outlook, while noting some labor shortages and continuing concern over geopolitical unrest.
Of the 18 manufacturing industries, 15 are reporting growth in September in the following order: Wood Products; Primary Metals; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Furniture & Related Products; Fabricated Metal Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Computer & Electronic Products; Paper Products; Chemical Products; Transportation Equipment; Petroleum & Coal Products; and Textile Mills. The three industries reporting contraction in September are: Machinery; Plastics & Rubber Products; and Electrical Equipment, Appliances & Components.
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
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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