Written by Steven Hansen
The ISM Manufacturing survey improved marginally and remains deep in contraction. The Markit PMI manufacturing index also improved marginally and remains deep in contraction.
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 decline. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession. No question these surveys suggest the economy is contracting all thanks to the coronavirus.
From Econoday:
| Consensus Range | Consensus | Actual | |
| Markit Manufacturing | 38.0 to 40.8 | 39.8 | 39.8 |
| ISM Manufacturing | 40.0 to 46.1 | 42.7 | 43.1 |
From the Markit PMI Manufacturing Index:
Sharpest contraction in output in series history due to COVID-19 impact
- Production and new orders fall substantially due to weak client demand
- Employment drops markedly amid signs of excess capacity
- Steepest decline in output charges on record
- May data signalled a slightly softer, but nonetheless severe, contraction in U.S. manufacturing output. The decrease in output was largely driven by a further weakening of client demand and lower new order inflows from both domestic and foreign customers amid the coronavirus disease 2019 (COVID19) outbreak. A marked decline in total sales and negative sentiment towards the outlook for output over the coming year drove employment down, as firms reduced workforce numbers substantially. At the same time, lower input buying and weaker overall demand conditions put pressure on suppliers to lower their prices. Consequently, input costs fell again, in turn helping manufacturers to cut their output charges at a record pace as firms sought to remain competitive.
- The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 39.8 in May, up from 36.1 at the start of the second quarter. Although slightly higher than April’s recent low, the latest figure signalled the second-steepest deterioration in manufacturing operating conditions since April 2009. The impact of ongoing emergency public health measures following the escalation of the COVID-19 outbreak led to a further severe decline in production across the U.S. goodsproducing sector in May. The fall in output was attributed to lower sales, temporary shutdowns and difficulties operating at full capacity amid new safety regulations. With the exception of April’s recent nadir, the rate of contraction was the fastest since February 2009.
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From the Institute of Supply Management report:
Economic activity in the manufacturing sector contracted in May, and the overall economy returned to expansion after one month of contraction, 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 May PMI® registered 43.1 percent, up 1.6 percentage points from the April reading of 41.5 percent. This figure indicates expansion in the overall economy after April’s contraction, which ended a period of 131 consecutive months of growth. The New Orders Index registered 31.8 percent, an increase of 4.7 percentage points from the April reading of 27.1 percent. The Production Index registered 33.2 percent, up 5.7 percentage points compared to the April reading of 27.5 percent. The Backlog of Orders Index registered 38.2 percent, an increase of 0.4 percentage point compared to the April reading of 37.8 percent. The Employment Index registered 32.1 percent, an increase of 4.6 percentage points from the April reading of 27.5 percent. The Supplier Deliveries Index registered 68 percent; though down 8 percentage points from the April figure of 76 percent, this high reading elevated the composite PMI®.
“The Inventories Index registered 50.4 percent, 0.7 percentage point higher than the April reading of 49.7 percent. The Prices Index registered 40.8 percent, up 5.5 percentage points compared to the April reading of 35.3 percent. The New Export Orders Index registered 39.5 percent, an increase of 4.2 percentage points compared to the April reading of 35.3 percent. The Imports Index registered 41.3 percent, a 1.4-percentage point decrease from the April reading of 42.7 percent.
“Three months into the manufacturing disruption caused by the coronavirus (COVID-19) pandemic, comments from the panel were cautious (two cautious comments for every one optimistic comment) regarding the near-term outlook. As was the case in April, the PMI® indicates a level of manufacturing-sector contraction not seen since April 2009; however, the trajectory improved. Demand contracted heavily again, with the (1) New Orders contracting at a strong level, again pushed by New Export Orders contraction; both indexes contracted at slower rates, (2) Customers’ Inventories Index returning to a level considered a positive for future production, and (3) Backlog of Orders Index remaining in strong contraction territory, in spite of weak production during the period. Consumption (measured by the Production and Employment indexes) contributed positively (a combined 10.3-percentage point increase) to the PMI® calculation, with many panelists classified as non-essential beginning to return to work in late May. Inputs — expressed as supplier deliveries, inventories and imports — strengthened again due to supplier delivery issues that were partially offset by continuing imports sluggishness. The delivery issues were the result of disruptions in domestic and global supply chains, driven primarily by supplier plant shutdowns. Inventory expanded due to issues with throughput and demand weakness. Inputs contributed negatively (a combined 7.3-percentage point decrease) to the PMI® calculation. (The Supplier Deliveries and Inventories indexes directly factor into the PMI®; the Imports Index does not.) Prices continued to contract (but at a slower rate in May), supporting a negative outlook.
“The coronavirus pandemic impacted all manufacturing sectors for the third straight month. May appears to be a transition month, as many panelists and their suppliers returned to work late in the month. However, demand remains uncertain, likely impacting inventories, customer inventories, employment, imports and backlog of orders. Among the six biggest industry sectors, Food, Beverage & Tobacco Products remains the only industry in expansion. Transportation Equipment; Petroleum & Coal Products; and Fabricated Metal Products continue to contract at strong levels,” says Fiore.
Of the 18 manufacturing industries, the six that reported growth in May — in the following order — are: Nonmetallic Mineral Products; Furniture & Related Products; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Paper Products; and Wood Products. The 11 industries reporting contraction in May, in order, are: Printing & Related Support Activities; Primary Metals; Transportation Equipment; Petroleum & Coal Products; Fabricated Metal Products; Machinery; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Chemical Products; Computer & Electronic Products; and Plastics & Rubber Products.
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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