November 2018 Manufacturing Survey Growth Mixed

Written by Steven Hansen

The ISM Manufacturing survey improved and continued in expansion. The key internals are in expansion. The Markit PMI manufacturing Index is in positive territory but declined.

From Econoday:

From the Markit PMI Manufacturing Index:

Output expands at joint-weakest rate since September 2017

• Production growth eases but remains strong
• New orders rise at fastest rate for six months
• Employment increases solidly
• November survey data signalled a solid improvement in operating conditions across the U.S. manufacturing sector, despite the headline PMI dipping to a three-month low. The upturn was supported by the fastest increase in new orders since May and a sharp rise in employment. Output also rose solidly, despite growth easing to the joint-weakest in over a year. Capacity pressures were also evident through a further rise in backlogs. Panellists continued to highlight stockpiling activity amid expectations of further rises in raw material prices, with input buying increasing strongly. Cost burdens rose markedly as shortages at suppliers and tariffs pushed up input prices.
• The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 55.3 in November, down slightly from 55.7 in October. Although the headline figure dipped to a three-month low, it indicated a solid improvement in the health of the sector that was above the series trend.

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From the Institute of Supply Management report:

Economic activity in the manufacturing sector expanded in November, and the overall economy grew for the 115th 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 November PMI® registered 59.3 percent, an increase of 1.6 percentage points from the October reading of 57.7 percent. The New Orders Index registered 62.1 percent, an increase of 4.7 percentage points from the October reading of 57.4 percent. The Production Index registered 60.6 percent, a 0.7 percentage-point increase compared to the October reading of 59.9 percent. The Employment Index registered 58.4 percent, an increase of 1.6 percentage points from the October reading of 56.8 percent. The Supplier Deliveries Index registered 62.5 percent, a 1.3-percentage point decrease from the October reading of 63.8 percent. The Inventories Index registered 52.9 percent, an increase of 2.2 percentage points from the October reading of 50.7 percent. The Prices Index registered 60.7 percent, a 10.9-percentage point decrease from the October reading of 71.6 percent, indicating higher raw materials prices for the 33rd consecutive month.

“Comments from the panel reflect continued expanding business strength. Demand remains strong, with the New Orders Index rebounding to above 60 percent, the Customers’ Inventories Index declining and remaining too low, and the Backlog of Orders Index steady. Consumptionstrengthened, with production and employment continuing to expand, both at higher levels compared to October. Inputs — expressed as supplier deliveries, inventories and imports — gained as a result of inventory growth. Supplier delivery easing improved factory consumption as well as inventory growth, and import expansion was relatively stable. Lead-time extensions continue, while steel and aluminum prices are declining. Supplier labor issues and transportation difficulties are at more manageable levels, but they continue to limit production potential.

“The expansion of new export orders was stable and at a recent historical low. However, four of six major industries contributed, down from five in October. Prices pressure continues, but at notably lower levels than in prior periods. The manufacturing community continues to expand, with November adding positively to the three-month rolling PMI® average,” says Fiore.

Of the 18 manufacturing industries, 13 reported growth in November, in the following order: Computer & Electronic Products; Plastics & Rubber Products; Paper Products; Textile Mills; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Chemical Products; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; Furniture & Related Products; and Petroleum & Coal Products. The three industries reporting contraction in November are: Printing & Related Support Activities; Nonmetallic Mineral Products; and Primary Metals.

Relatively deep penetration of this index below 50 has normally resulted in a recession.

Readings above 50 in the ISM manufacturing index signal month- to-month growth for U.S. manufacturing as a whole, while those below 50 indicate monthly contraction. For the economy as a whole, readings above 60 signal national GDP growth of 5 percent, while those below 43 signal GDP contraction.
Data Source: Haver Analytics z ism_mfg_pic.png

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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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