Written by Steven Hansen
The ISM Manufacturing survey insignificantly improved and remained marginally in expansion. The key internals declined and but were mixed. The Markit PMI manufacturing Index, also released today, is in positive territory and improved.
Analyst Opinion of the ISM Manufacturing Survey
ISM manufacturing index movements have correlated with Industrial Production Manufacturing index only half the time in the last 12 months. Based on this survey and the divided district Federal Reserve Surveys (some in expansion, some in contraction), one would expect the Fed’s Industrial Production index to be little changed in October. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession..
There is nothing in the ISM or Markit reports that would leave one to think manufacturing is on the mend.
The ISM Manufacturing survey index (PMI) marginally improved from 51.5 to 51.9 (50 separates manufacturing contraction and expansion). This was slightly above expectations which were 50.6 to 52.2 (consensus 51.6).
Earlier today, the Markit PMI Manufacturing Index was released:
PMI reaches highest level for a year in October
- Gains in output and new orders underpin sharp improvement in operating conditions
- Jobs added again, albeit at modest pace
- Cost inflation rises to highest level for two years
- October’s headline Markit Final U.S. Manufacturing Purchasing Managers’ Index™ (PMITM) was slightly better than the earlier flash reading of 53.2, coming in at 53.4. That was a marked improvement on September’s 51.5 and the best reading recorded for a year. Operating conditions have continuously improved throughout the past seven years, with October’s PMI reading notable for being the highest recorded by the survey for 12 months.
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​The regional Fed manufacturing surveys are mixed, and now the ISM indicates manufacturing shows marginal expansion.
Relatively deep penetration of this index below 50 has normally resulted in a recession.
The noisy Backlog of Orders improved and remans 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 October, and the overall economy grew for the 89th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The October PMI® registered 51.9 percent, an increase of 0.4 percentage point from the September reading of 51.5 percent. The New Orders Index registered 52.1 percent, a decrease of 3 percentage points from the September reading of 55.1 percent. The Production Index registered 54.6 percent, 1.8 percentage points higher than the September reading of 52.8 percent. The Employment Index registered 52.9 percent, an increase of 3.2 percentage points from the September reading of 49.7 percent. Inventories of raw materials registered 47.5 percent, a decrease of 2 percentage points from the September reading of 49.5 percent. The Prices Index registered 54.5 percent in October, an increase of 1.5 percentage points from the September reading of 53 percent, indicating higher raw materials prices for the eighth consecutive month. Comments from the panel are largely positive citing a favorable economy and steady sales, with some exceptions.
Of the 18 manufacturing industries, 10 are reporting growth in October in the following order: Textile Mills; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Computer & Electronic Products; Furniture & Related Products; Paper Products; Printing & Related Support Activities; Petroleum & Coal Products; and Chemical Products. The eight industries reporting contraction in October — listed in order — are: Wood Products; Apparel, Leather & Allied Products; Primary Metals; Plastics & Rubber Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Fabricated Metal Products; and Machinery.
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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.
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 jobs growth.
The ISM employment index appears useful in predicting turning points which can lead the BLS data up to one year.
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