June 2020 ISM and Markit Manufacturing Surveys Improve

Written by Steven Hansen

The ISM Manufacturing survey improved and now is in expansion. The Markit PMI manufacturing index also improved but remains slightly in contraction.

From Econoday:

From the Markit PMI Manufacturing Index:

Record rise in manufacturing PMI amid looser COVID-19 restrictions

• Contraction in output slows as new orders stabilise
• First increase in selling prices since February, albeit only fractional
• Job losses ease amid renewed optimism
• June PMITM data signalled only a fractional deterioration in U.S. manufacturing conditions as goods producers and their customers began to reopen amid looser restrictions following the outbreak of coronavirus disease 2019 (COVID-19). The downward trend in production eased markedly as new orders stabilised amid reports of a relative improvement in demand conditions. Companies reported a further drop in workforce numbers as evidence of spare capacity remained, but the rate of job losses also moderated sharply. Optimism about the year ahead meanwhile revived considerably.
• At the same time, inflationary pressures picked up, as both input costs and output charges rose for the first time in the second quarter. The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 49.8 in June, up a record 10points from 39.8 in May, to signal a marked easing in the overall manufacturing downturn. The latest figure was also slightly higher than the earlier released ‘flash’ reading of 49.6.

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From the Institute of Supply Management report:

Economic activity in the manufacturing sector grew in June, with the overall economy notching a second month of growth 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 June PMI® registered 52.6 percent, up 9.5 percentage points from the May reading of 43.1 percent. This figure indicates expansion in the overall economy for the second straight month after April’s contraction, which ended a period of 131 consecutive months of growth. The New Orders Index registered 56.4 percent, an increase of 24.6 percentage points from the May reading of 31.8 percent. The Production Index registered 57.3 percent, up 24.1 percentage points compared to the May reading of 33.2 percent. The Backlog of Orders Index registered 45.3 percent, an increase of 7.1 percentage points compared to the May reading of 38.2 percent. The Employment Index registered 42.1 percent, an increase of 10 percentage points from the May reading of 32.1 percent. The Supplier Deliveries Index registered 56.9 percent, down 11.1 percentage points from the May figure of 68 percent.

“The Inventories Index registered 50.5 percent, 0.1 percentage point higher than the May reading of 50.4 percent. The Prices Index registered 51.3 percent, up 10.5 percentage points compared to the May reading of 40.8 percent. The New Export Orders Index registered 47.6 percent, an increase of 8.1 percentage points compared to the May reading of 39.5 percent. The Imports Index registered 48.8 percent, a 7.5-percentage point increase from the May reading of 41.3 percent.

“June signifies manufacturing entering an expected expansion cycle after the disruption caused by the coronavirus (COVID-19) pandemic. Comments from the panel were positive (1.3 positive comments for every one cautious comment), reversing the cautious trend which began in March. The manufacturing sector is reversing the heavy contraction of April, with the PMI® increasing month-over-month at a rate not seen since August 1980, with several other indexes also posting gains not seen in modern times. Demand expanded, with the (1) New Orders Index growing at a respectable level, supported by New Export Orders Index contraction softening; (2) Customers’ Inventories Index returning to a level considered a positive for future production, and (3) Backlog of Orders Index softening, although still contracting. Consumption (measured by the Production and Employment indexes) contributed positively (a combined 34.1-percentage point increase) to the PMI® calculation, with most companies’ employees returning to work in June. Inputs — expressed as supplier deliveries, inventories and imports — weakened, due to supplier delivery issues abating and import levels improving. Inventory levels reached parity with supply and demand. Inputs contributed negatively (a combined 11-percentage point decrease) to the PMI® calculation but were more than offset by the demand and consumption improvement. (The Supplier Deliveries and Inventories indexes directly factor into the PMI®; the Imports Index does not.) Prices entered expansion again, but at marginal levels, supporting a positive outlook.

“As predicted, the growth cycle has returned after three straight months of COVID-19 disruptions. Demand, consumption and inputs are reaching parity and are positioned for a demand-driven expansion cycle as we enter the second half of the year. Among the six biggest industry sectors, Food, Beverage & Tobacco Products remains the best performing industry sector, and Computer & Electronic Products, and Chemical Products returned to respectable growth. Transportation Equipment and Fabricated Metal Products continue to contract, but at much softer levels,” says Fiore.

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

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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