Written by Steven Hansen
The ISM Manufacturing survey insignificantly declined and remained in expansion. The key internals are in expansion. The Markit PMI manufacturing Index is in positive territory and insignificantly improved.
Analyst Opinion of the ISM Manufacturing Survey
Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed’s Industrial Production index growth rate remain about the same as last month. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession.
From Bloomberg / Econoday:
Consensus Range | Consensus | Actual | |
Markit Manufacturing | 55.7 to 55.7 | 55.7 | 55.6 |
ISM Manufacturing | 58.8 to 61.0 | 60.0 | 59.3 |
From the Markit PMI Manufacturing Index:
March PMI indicates strongest manufacturing growth for three years
- PMI rises to highest since March 2015
- Output and new orders continue to increase markedly
- Input costs rise to the greatest extent since November 2012
- March PMI survey data signalled a strong overall improvement in operating conditions across the U.S. manufacturing sector. Output and new orders continued to rise markedly, despite rates of growth softening slightly since February. Job creation also remained strong and backlogs of uncompleted work increased solidly as a result of the recent upturn in client demand. Business confidence about the year ahead meanwhile rose to the highest since February 2015.
- Inflationary pressures intensified, however, with rates of both input price and output charge inflation accelerating to multi-year peaks. The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 55.6 in March, up from 55.3 in February. The latest PMI reading indicated the strongest improvement in manufacturing business conditions since March 2015. The average PMI reading over the opening three months of 2018 meanwhile indicated the best quarterly performance since the third quarter of 2014.
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From the Institute of Supply Management report:
Relatively deep penetration of this index below 50 has normally resulted in a recession.
Excepts from the ISM release:
Economic activity in the manufacturing sector expanded in March, and the overall economy grew for the 107th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®.
The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: “The March PMI® registered 59.3 percent, a decrease of 1.5 percentage points from the February reading of 60.8 percent. The New Orders Index registered 61.9 percent, a decrease of 2.3 percentage points from the February reading of 64.2 percent. The Production Index registered 61 percent, a 1 percentage point decrease compared to the February reading of 62 percent. The Employment Index registered 57.3 percent, a decrease of 2.4 percentage points from the February reading of 59.7 percent. The Supplier Deliveries Index registered 60.6 percent, a 0.5 percentage point decrease from the February reading of 61.1 percent. The Inventories Index registered 55.5 percent, a decrease of 1.2 percentage points from the February reading of 56.7 percent. The Prices Index registered 78.1 percent in March, a 3.9 percentage point increase from the February reading of 74.2 percent, indicating higher raw materials prices for the 25th consecutive month. Comments from the panel reflect continued expanding business strength. Demand remains robust, with the New Orders Index at 60 or above for the 11th straight month, and the Customers’ Inventories Index at its lowest level since July 2011. The Backlog of Orders Index continued a 14-month expansion with its highest reading since May 2004, when it registered 63 percent. Consumption, described as production and employment, continues to expand, with indications that labor and skill shortages are affecting production output. Inputs, expressed as supplier deliveries, inventories and imports, were negatively impacted by weather conditions; Asian holidays; lead time extensions; steel and aluminum disruptions across many industries; supplier labor issues; and transportation difficulties due to driver and equipment shortages. Export orders remained strong, supported by a weaker U.S. currency. The Prices Index is at its highest level since April 2011, when it registered 82.6 percent. In March, price increases occurred across 17 of 18 industry sectors. Demand remains robust, but the nation’s employment resources and supply chains are still struggling to keep up.”
Of the 18 manufacturing industries, 17 reported growth in March, in the following order: Fabricated Metal Products; Plastics & Rubber Products; Computer & Electronic Products; Paper Products; Printing & Related Support Activities; Nonmetallic Mineral Products; Transportation Equipment; Petroleum & Coal Products; Wood Products; Machinery; Chemical Products; Textile Mills; Electrical Equipment, Appliances & Components; Furniture & Related Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Primary Metals. The only industry reporting a decrease during the period is Apparel, Leather & Allied Products.
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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).
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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