April 2019 ISM and Markit Manufacturing Surveys Show Weak Growth

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 insignificantly improved.

From Econoday:

From the Markit PMI Manufacturing Index:

Solid rise in new orders drives further improvement in operating conditions

• New business growth picks up to three-month high leading to slightly stronger increase in output
• Employment expands at softest rate since June 2017
• U.S. manufacturing firms registered a moderate improvement in operating conditions in April. Expansions in output and new orders picked up from March’s recent lows, with new business growth the fastest for three months. Despite a further rise in backlogs of work, the rate of job creation was the slowest since June 2017 and only moderate overall, in part reflecting skill shortages. Expectations towards the coming year were relatively subdued and down to the lowest seen so far this year. Meanwhile, inflationary pressures continued to soften for a sixth month running.
• The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 52.6, up slightly from March’s recent low of 52.4. This signalled that the latest improvement in the health of the U.S. manufacturing sector was the second-slowest since June 2017.

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From the Institute of Supply Management report:

Economic activity in the manufacturing sector expanded in April, and the overall economy grew for the 120th 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 April PMI® registered 52.8 percent, a decrease of 2.5 percentage points from the March reading of 55.3 percent. The New Orders Index registered 51.7 percent, a decrease of 5.7 percentage points from the March reading of 57.4 percent. The Production Index registered 52.3 percent, a 3.5-percentage point decrease compared to the March reading of 55.8 percent. The Employment Index registered 52.4 percent, a decrease of 5.1 percentage points from the March reading of 57.5 percent. The Supplier Deliveries Index registered 54.6 percent, a 0.4-percentage point increase from the March reading of 54.2 percent. The Inventories Index registered 52.9 percent, an increase of 1.1 percentage points from the March reading of 51.8 percent. The Prices Index registered 50 percent, a 4.3-percentage point decrease from the March reading of 54.3 percent.

“Comments from the panel reflect continued expanding business strength, but at the softest levels since the fourth quarter of 2016. Demand expansion continued, with the New Orders Index softening to the low 50s, the Customers’ Inventories Index remaining at a ‘too low’ status, and the Backlog of Orders Index improving its prior month performance. Consumption (production and employment) continued to expand, but at lower levels, resulting in a combined decrease of 8.6 points. Inputs — expressed as supplier deliveries, inventories and imports — were higher this month, primarily due to inventory growth exceeding consumption, resulting in a combined 1.5-percentage point improvement in the Supplier Deliveries and Inventories Indexes. Imports contracted during the period. Overall, inputs reflect a more stable business environment, confirmed by the Prices Index at zero price growth, or unchanged.

“Exports orders contracted for the first time since February 2016. The PMI® trade elements are in contraction territory. The PMI® has been inching down since November 2018. The manufacturing sector is expanding, but at recent historic lows,” says Fiore.

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

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

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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.

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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 the 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, the 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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