Written by Steven Hansen
The ISM Manufacturing survey continues to indicate manufacturing growth expansion – however this index has been declining since November 2014. The key internal new orders modestly improved and remains in expansion). Backlog of orders is unchanged and remains contraction.
The ISM Manufacturing survey index (PMI) was unchanged at 51.5 (50 separates manufacturing contraction and expansion). This was within expectations which were 50.0 to 53.0 (consensus 52.0).
Earlier today, the PMI Manufacturing Index was released – from Bloomberg:
|PMI Manufacturing Index|
Production is the softest it’s been all year, and that of course includes the winter months which, in most data, were hit hard by heavy weather. Deliveries continue to be delayed, the result not of strong demand but, interestingly, of continued issues tied to the long resolved port slowdown on the West Coast.
Price data, as they are in other reports, are very weak with inputs in contraction for a 4th month. The strong dollar may also be a factor here, pulling down the costs of imports.
Despite all the weakness, employment, as it has in other reports, continues to expand and at what this report describes a “robust” pace. But strength here will prove fleeting if orders don’t pick up.
This ISM Manufacturing index had been in a general uptrend since mid 2013, the three month trend is now clearly in decline. This is the 28th month of expansion. The regional Fed manufacturing surveys indicated little growth or contraction in April, and now the ISM indicates manufacturing shows weak expansion.
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders was unchanged at 49.5 – and remains in contraction. Backlog growth should be 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 April for the 28th consecutive month, and the overall economy grew for the 71st consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The April PMI® registered 51.5 percent, the same reading as in March. The New Orders Index registered 53.5 percent, an increase of 1.7 percentage points from the reading of 51.8 percent in March. The Production Index registered 56 percent, 2.2 percentage points above the March reading of 53.8 percent. The Employment Index registered 48.3 percent, 1.7 percentage points below the March reading of 50 percent, reflecting contracting employment levels from March. Inventories of raw materials registered 49.5 percent, a decrease of 2 percentage points from the March reading of 51.5 percent. The Prices Index registered 40.5 percent, 1.5 percentage points above the March reading of 39 percent, indicating lower raw materials prices for the sixth consecutive month. While the March and April PMI® were equal, both registering 51.5 percent, 15 of the 18 manufacturing industries reported growth in April while only 10 industries reported growth in March, indicating a broader distribution of growth in April among the 18 industries.
Of the 18 manufacturing industries, 15 are reporting growth in April in the following order: Nonmetallic Mineral Products; Plastics & Rubber Products; Wood Products; Printing & Related Support Activities; Furniture & Related Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Paper Products; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Textile Mills; Electrical Equipment, Appliances & Components; Chemical Products; and Primary Metals. The two industries reporting contraction in April are: Apparel, Leather & Allied Products; and Computer & Electronic 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 – and improved from 51.8 to 53.5. 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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|Institute of Supply Management Surveys||Institute of Supply Management Surveys|
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