Written by Steven Hansen
The ISM Manufacturing survey declined and remains barely in expansion. The Markit PMI manufacturing index also declined and remains barely in expansion.
Analyst Opinion of the Manufacturing Surveys
Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed’s Industrial Production index growth rate to be little changed. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession.
From Econoday:
Consensus Range | Consensus | Actual | |
Markit Manufacturing | 50.8 to 50.9 | 50.8 | 50.7 |
ISM Manufacturing | 49.5 to 51.0 | 50.4 | 50.1 |
From the Markit PMI Manufacturing Index:
Manufacturing output growth weakens amid slower upturn in new orders
- Operating conditions improve at softest pace for six months
- New order growth slows to nine-month low
- Business confidence strongest since April 2019
- U.S. manufacturing firms signalled a loss of growth momentum in February as operating conditions improved at only a marginal pace. Overall growth was the slowest for six months amid historically subdued expansions in output and new orders. Nonetheless, firms registered the strongest degree of optimism for ten months. Greater confidence in higher future output did not translate into faster job creation, as employment growth slowed despite a renewed rise in backlogs. At the same time, subdued inflationary pressures continued to be reported midway through the first quarter, with slower growth of costs helping keep selling price inflation muted.
- The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.7 in February, little-changed from the ‘flash’ figure of 50.8, and down from 51.9 seen at the start of the year. The improvement in the health of the manufacturing sector was the weakest since last August and only marginal overall. A key contributing factor behind slower manufacturing growth was a weaker upturn in output. The marginal expansion was the softest since July 2019, and although some firms reported higher new order volumes, supply chain issues following the outbreak of coronavirus in China were reported to have affected production and constrained output in some cases.
z markit_pmi.PNG
From the Institute of Supply Management report:
Economic activity in the manufacturing sector grew in February, and the overall economy grew for the 130th 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 50.1 percent, down 0.8 percentage point from the January reading of 50.9 percent. The New Orders Index registered 49.8 percent, a decrease of 2.2 percentage points from the January reading of 52 percent. The Production Index registered 50.3 percent, down 4 percentage points compared to the January reading of 54.3 percent. The Backlog of Orders Index registered 50.3 percent, an increase of 4.6 percentage points compared to the January reading of 45.7 percent. The Employment Index registered 46.9 percent, an increase of 0.3 percentage point from the January reading of 46.6 percent. The Supplier Deliveries Index registered 57.3 percent, up 4.4 percentage points from the January reading of 52.9 percent. The Inventories Index registered 46.5 percent, 2.3 percentage points lower than the January reading of 48.8 percent. The Prices Index registered 45.9 percent, down 7.4 percentage points as compared to the January reading of 53.3 percent. The New Export Orders Index registered 51.2 percent, a decrease of 2.1 percentage points as compared to the January reading of 53.3 percent. The Imports Index registered 42.6 percent, an 8.7-percentage point decrease from the January reading of 51.3 percent.
“Comments from the panel were generally positive, with sentiment cautious compared to January. The PMI® remained in expansion territory, but at a weak level. Demand slumped, with (1) the New Orders Index contracting at a weak level, despite new export order expansion, (2) the Customers’ Inventories Index remaining at ‘too low’ status and (3) the Backlog of Orders Index expanding for the first time in several months, but at a slow rate. Consumption (measured by the Production and Employment indexes) contributed negatively (a combined 3.7-percentage point decrease) to the PMI® calculation. Inputs — expressed as supplier deliveries, inventories and imports — strengthened in February, due primarily to supplier deliveries expanding, offset partially by inventories declining. Despite imports contraction returning at a strong rate, inputs contributed positively to the PMI® calculation, a reversal from the previous month. (The Supplier Deliveries and Inventories indexes directly factor into the PMI®; the Imports Index does not.) Prices returned to contraction, at moderately strong levels.
“Global supply chains are impacting most, if not all, of the manufacturing industry sectors. Among the six big industry sectors, Food, Beverage & Tobacco Products remains the strongest, followed by Computer & Electronic Products. Petroleum & Coal Products is the weakest. Overall, sentiment this month is marginally positive regarding near-term growth,” says Fiore.
Of the 18 manufacturing industries, the 14 that reported growth in February — listed in order — are: Wood Products; Furniture & Related Products; Plastics & Rubber Products; Printing & Related Support Activities; Paper Products; Textile Mills; Primary Metals; Food, Beverage & Tobacco Products; Computer & Electronic Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Machinery; and Chemical Products. The three industries reporting contraction in February are: Petroleum & Coal Products; Transportation Equipment; and Nonmetallic Mineral Products.
Relatively deep penetration of this index below 50 has normally resulted in a recession.
z ism_mfg_pic.png
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.
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).
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.
include(“/home/aleta/public_html/files/ad_openx.htm”); ?>