Written by Steven Hansen
The ISM Manufacturing survey improved and remained marginally in expansion. The key internals improved and but remain 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 unusually unified district Federal Reserve Surveys (all in expansion, one would expect the Fed’s Industrial Production index to be improved in November. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession..
The ISM Manufacturing survey index (PMI) marginally improved from 51.9 to 53.2 (50 separates manufacturing contraction and expansion). This was slightly above expectations which were 52.0 to 52.5 (consensus 52.3).
Earlier today, the Markit PMI Manufacturing Index was released:
Strongest rate of new order growth since March 2015
- Fastest rise in output for 20 months, underpinned by improving order books
- Payroll numbers and input buying increase during November
- Cost inflation slows from October’s two-year peak
- November data pointed to a sustained acceleration in U.S. manufacturing growth, with production volumes and incoming new work both rising at the fastest pace since March 2015. Stronger demand patterns, especially from domestic clients, resulted in greater input buying and increased payroll numbers across the manufacturing sector. Meanwhile, factory gate charges increased only slightly in November amid a slowdown in cost inflation from October’s two-year high.
- At 54.1 in November, the final Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) picked up from 53.4 in October and signalled the strongest improvement in business conditions for just over one year. The latest reading was up from the earlier ‘flash’ reading (53.9) and the joint-highest seen since March 2015, thereby signalling a robust improvement in manufacturing performance.
z markit_pmi.png
​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 November, and the overall economy grew for the 90th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The report was issued today by Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee. “The November PMI® registered 53.2 percent, an increase of 1.3 percentage points from the October reading of 51.9 percent. The New Orders Index registered 53 percent, an increase of 0.9 percentage point from the October reading of 52.1 percent. The Production Index registered 56 percent, 1.4 percentage points higher than the October reading of 54.6 percent. The Employment Index registered 52.3 percent, a decrease of 0.6 percentage point from the October reading of 52.9 percent. Inventories of raw materials registered 49 percent, an increase of 1.5 percentage points from the October reading of 47.5 percent. The Prices Index registered 54.5 percent in November, the same reading as in October, indicating higher raw materials prices for the ninth consecutive month. Comments from the panel cite increasing demand, some tightness in the labor market and plans to reduce inventory by the end of the year.”
Of the 18 manufacturing industries, 11 are reporting growth in November in the following order: Miscellaneous Manufacturing; Petroleum & Coal Products; Paper Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Chemical Products; Fabricated Metal Products; Plastics & Rubber Products; Machinery; Nonmetallic Mineral Products; and Primary Metals. The six industries reporting contraction in November — listed in order — are: Printing & Related Support Activities; Wood Products; Apparel, Leather & Allied Products; Electrical Equipment, Appliances & Components; Transportation Equipment; and Furniture & Related Products.
z%20ism_mfg.png
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
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 jobs growth.
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”); ?>