Written by Steven Hansen
The ISM Manufacturing survey continues to indicate manufacturing growth expansion – but again marginally declined this month with this survey remains barely in expansion. The key internal new orders improved and remains in expansion. Backlog of orders contraction improved over the contraction the previous month..
The ISM Manufacturing survey index (PMI) marginally declined from 50.2 to 50.1 (50 separates manufacturing contraction and expansion). This was at expectations which were 48.9 to 51.5 (consensus 50.0).
Earlier today, the PMI Manufacturing Index was released – from Bloomberg:
Released On 11/2/2015 9:45:00 AM For Oct, 2015
Prior Consensus Consensus Range Actual Level 53.1 54.1 53.0 to 54.5 54.1 Highlights
Most measures of the U.S. factory sector are in contraction or, like the upcoming ISM report, in near contraction, but not the manufacturing PMI which continues to post solid rates of growth. In the best reading since April, the PMI came in at 54.1 for final October for a 1 tenth gain from the flash reading and a very definitive 1.0 point gain from September.Output is described as “robust” while new orders are accelerating as are, in what is a real contrast with other manufacturing reports, backlog orders where the build is contributing to strength in the sample’s employment. Delivery times are up, which is another indication of strength. Input prices are down sharply while finished goods prices are fractionally higher.
This report, though on its own in terms of direction, at least has been consistent, never coming close to contraction over a year of actual contraction. A dead even 50.0 reading is expected for the ISM at 10:00 a.m. ET this morning.
This is the 34th 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 improved. 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 October for the 34th consecutive month, and the overall economy grew for the 77th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The October PMI® registered 50.1 percent, a decrease of 0.1 percentage point from the September reading of 50.2 percent. The New Orders Index registered 52.9 percent, an increase of 2.8 percentage points from the reading of 50.1 percent in September. The Production Index registered 52.9 percent, 1.1 percentage points above the September reading of 51.8 percent. The Employment Index registered 47.6 percent, 2.9 percentage points below the September reading of 50.5 percent. Backlog of Orders registered 42.5 percent, an increase of 1 percentage point from the September reading of 41.5 percent. The Prices Index registered 39 percent, an increase of 1 percentage point from the September reading of 38 percent, indicating lower raw materials prices for the 12th consecutive month. The New Export Orders Index registered 47.5 percent, up 1 percentage point from September, and the Imports Index registered 47 percent, down 3.5 percentage points from the September reading of 50.5 percent. Comments from the panel reflect concern over the high price of the dollar and the continuing low price of oil, mixed with cautious optimism about steady to increasing demand in several industries.
Of the 18 manufacturing industries, seven are reporting growth in October in the following order: Printing & Related Support Activities; Furniture & Related Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Chemical Products; Paper Products; and Fabricated Metal Products. The nine industries reporting contraction in October — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Machinery; Transportation Equipment; Wood 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. 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
z survey1.png
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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