Written by Steven Hansen
The ISM Manufacturing survey was in contraction for the second month in a row. The key internals were in contraction.
The ISM Manufacturing survey index (PMI) marginally declined from 48.6 to 48.2 (50 separates manufacturing contraction and expansion). This was slightly below expectations which were 48.5 to 50.4 (consensus 49.2).
Earlier today, the PMI Manufacturing Index was released – from Bloomberg:
Released On 1/4/2016 9:45:00 AM For Dec, 2015
Prior Actual Level 52.8 51.2 Highlights
The manufacturing PMI has been consistently running warmer than other manufacturing surveys which helps put into context the disappointment of December’s slowing to 51.2, down from 52.8 in November. The final reading for December is 1 tenth lower than the mid-month flash. Near stagnation in new orders is a key negative in the report, one that points to further slowing for the headline index in coming readings. Orders are still growing but at their slowest pace of the recovery, since September 2009. Backlog orders are contracting sharply, the most since September 2009 as well. The report points to widespread weakness across orders including for export orders where manufacturers continue to site strength in the dollar as a negative.Among other readings, production is flat, pre-production inventories are down, but hiring, at least for now, is still strong. Price data show continued contraction for inputs, the result of low oil and commodity prices, but a third month of gains for finished prices which is one of the few pluses in this report. Up next at 10:00 a.m. ET on the calendar will be the very closely watched ISM manufacturing report.
The regional Fed manufacturing surveys indicated little growth or contraction in November, and now the ISM indicates manufacturing shows contraction.
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 contracted in December for the second consecutive month, while the overall economy grew for the 79th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The December PMI® registered 48.2 percent, a decrease of 0.4 percentage point from the November reading of 48.6 percent. The New Orders Index registered 49.2 percent, an increase of 0.3 percentage point from the reading of 48.9 percent in November. The Production Index registered 49.8 percent, 0.6 percentage point higher than the November reading of 49.2 percent. The Employment Index registered 48.1 percent, 3.2 percentage points below the November reading of 51.3 percent. The Prices Index registered 33.5 percent, a decrease of 2 percentage points from the November reading of 35.5 percent, indicating lower raw materials prices for the 14th consecutive month. The New Export Orders Index registered 51 percent, up 3.5 percentage points from the November reading of 47.5 percent and the Imports Index registered 45.5 percent, down 3.5 percentage points from the November reading of 49 percent. As was the case in November, 10 out of 18 manufacturing industries reported contraction in December. Contraction in new orders, production, employment and raw materials inventories accounted for the overall softness in December.
Of the 18 manufacturing industries, six are reporting growth in December in the following order: Printing & Related Support Activities; Textile Mills; Paper Products; Miscellaneous Manufacturing; Chemical Products; and Food, Beverage & Tobacco Products. The 10 industries reporting contraction in December — listed in order — are: Apparel, Leather & Allied Products; Plastics & Rubber Products; Machinery; Primary Metals; Fabricated Metal Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Wood Products; and Nonmetallic Mineral 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. 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.
include(“/home/aleta/public_html/files/ad_openx.htm”); ?>
