February 2019 ISM and Markit Manufacturing Surveys Growth Rate Declined

Written by Steven Hansen

The ISM Manufacturing survey declined but continued in expansion. The key internals were mixed. The Markit PMI manufacturing Index remained in positive territory and also declined.

From Econoday:

From the Markit PMI Manufacturing Index:

PMI dips to 18-month low in February

• Operating conditions improve at slowest pace since August 2017
• Rates of output and new order growth soften
• Inflationary pressures ease
• February data signalled a softer, but still solid, improvement in operating conditions across the U.S. manufacturing sector. The headline PMI slipped to its lowest since August 2017 amid slower expansions in output and new orders. Notably, the increases were slower than their respective long-run trends, with growth rates dipping to 17- and 20-month lows, respectively. Meanwhile, foreign client demand continued to rise marginally. A sustained upturn in new orders led to a further rise in employment, with backlogs also increasing.
• At the same time, inflationary pressures softened in February. Rates of both input price and output charge inflation eased from January, with the former edging down to an 18-month low. The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 53.0 in February, down from 54.9 at the start of the year. Midway through the first quarter of 2019, manufacturing firms indicated a solid, albeit softer, improvement in the health of the sector, with the index registering its lowest level for 18 months.

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From the Institute of Supply Management report:

Economic activity in the manufacturing sector expanded in February, and the overall economy grew for the 118th 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 February PMI® registered 54.2 percent, an decrease of 2.4 percentage points from the January reading of 56.6 percent. The New Orders Index registered 55.5 percent, a decrease of 2.7 percentage points from the January reading of 58.2 percent. The Production Index registered 54.8 percent, 5.7-percentage point decrease compared to the January reading of 60.5 percent. The Employment Index registered 52.3 percent, a decrease of 3.2 percentage points from the January reading of 55.5 percent. The Supplier Deliveries Index registered 54.9 percent, a 1.3 percentage point decrease from the January reading of 56.2 percent. The Inventories Index registered 53.4 percent, an increase of 0.6 percentage point from the January reading of 52.8 percent. The Prices Index registered 49.4 percent, a 0.2-percentage point decrease from the January reading of 49.6 percent, indicating lower raw materials prices for the second straight month after nearly three years of increases.

“Comments from the panel reflect continued expanding business strength, supported by notable demand and output, although both were softer than the prior month. Demand expansion continued, with the New Orders Index reaching the mid-50s, the Customers’ Inventories Index scoring lower and remaining too low, and the Backlog of Orders returning to a low-50s expansion level. Consumption (production and employment) continued to expand but fell a combined 8.9 points from the previous month’s levels. Inputs — expressed as supplier deliveries, inventories and imports — stabilized at a mid-50s level and had a slight negative impact on the PMI®. Inputs continue to reflect an easing business environment, confirmed by Prices Index contraction.

“Exports continue to expand, at slightly stronger rates compared to January. The manufacturing sector continues to expand, but inputs and prices indicate easing of supply chain constraints,” says Fiore.

Of the 18 manufacturing industries, 16 reported growth in February, in the following order: Printing & Related Support Activities; Textile Mills; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Paper Products; Wood Products; Primary Metals; Chemical Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Petroleum & Coal Products; Transportation Equipment; Machinery; Furniture & Related Products; and Plastics & Rubber Products. The only industry reporting contraction in February is Nonmetallic Mineral Products.

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

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eadings 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

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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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