Written by Steven Hansen
The ISM Manufacturing survey continues to indicate manufacturing growth expansion – but again marginally declined this month with this survey now barely in expansion. The key internal new orders declined but remains in expansion. Backlog of orders contraction worsened over the contraction the previous month..
The ISM Manufacturing survey index (PMI) marginally declined from 51.1 to 50.2 (50 separates manufacturing contraction and expansion). This was slightly below expectations which were 50.0 to 51.5 (consensus 50.5).
Earlier today, the PMI Manufacturing Index was released – from Bloomberg:
Released On 10/1/2015 9:45:00 AM For Sep, 2015
Prior Consensus Consensus Range Actual Level 53.0 53.0 52.6 to 53.0 53.1 Highlights
Markit’s sample is still in the growth column but, relative to its past performance, is signaling trouble in the manufacturing sector. The manufacturing PMI inched 1 tenth higher to a final September reading of 53.1 vs 53.0 in the September flash and October final readings. These readings are all near a two-year low.New orders and production are slowing as is employment which, at a two-year low, is now slowing sharply. Input prices, pulled down by lower commodity prices and strength in the dollar, continue to fall while final prices, in a sign seen in many other September reports, showing its weakest result in three years.
Markit’s sample is blaming an uncertain global outlook for the slowing, specifically weakness in export sales, as well as generally cautious spending patterns among their clients. Watch for the ISM index coming up at 10:00 a.m. ET.
This is the 33rd month of expansion. The regional Fed manufacturing surveys indicated little growth or contraction in September, 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 contraction worsened. 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 September for the 33rd consecutive month, and the overall economy grew for the 76th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The September PMI® registered 50.2 percent, a decrease of 0.9 percentage point from the August reading of 51.1 percent. The New Orders Index registered 50.1 percent, a decrease of 1.6 percentage points from the reading of 51.7 percent in August. The Production Index registered 51.8 percent, 1.8 percentage points below the August reading of 53.6 percent. The Employment Index registered 50.5 percent, 0.7 percentage point below the August reading of 51.2 percent. Backlog of Orders registered 41.5 percent, a decrease of 5 percentage points from the August reading of 46.5 percent. The Prices Index registered 38 percent, a decrease of 1 percentage point from the August reading of 39 percent, indicating lower raw materials prices for the 11th consecutive month. The New Export Orders Index registered 46.5 percent, the same reading as in August. Comments from the panel are mixed with some concern about the global economy and customer confidence.
Of the 18 manufacturing industries, seven are reporting growth in September in the following order: Printing & Related Support Activities; Textile Mills; Furniture & Related Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Paper Products; and Nonmetallic Mineral Products. The 11 industries reporting contraction in September — listed in order — are: Primary Metals; Apparel, Leather & Allied Products; Petroleum & Coal Products; Wood Products; Electrical Equipment, Appliances & Components; Machinery; Computer & Electronic Products; Fabricated Metal Products; Plastics & Rubber Products; Transportation Equipment; and Chemical 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 degraded from 51.7 to 50.1. 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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