Written by Steven Hansen
The ISM Manufacturing survey improved and remains in expansion. The Markit PMI manufacturing index also improved and remains 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 slightly better than last month. 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 no longer in recession.
From Econoday:
Consensus Range | Consensus | Actual | |
Markit Manufacturing | 50.7 to 51.3 | 51.3 | 53.1 |
ISM Manufacturing | 49.0 to 57.0 | 53.5 | 56.0 |
From the Markit PMI Manufacturing Index:
Fastest manufacturing expansion since January 2019
- Faster upturn in new orders as export growth hits four-year high
- Quickest rise in employment since November 2019
- Cost pressures strongest since early-2019
- August PMITM data from IHS Markit signalled a solid improvement in operating conditions across the U.S. manufacturing sector, with overall growth accelerating to the strongest since early2019. The upturn reflected faster increases in output and new orders, with firms also indicating a renewed rise in employment. Moreover, companies registered the highest degree of confidence in the outlook for output over the coming year since April 2019 amid hopes of further growth of client demand. On the price front, input costs rose sharply amid supplier price hikes and raw material shortages. Firms were able to partly pass on higher cost burdens through a modest increase in selling prices.
- The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 53.1 in August, down slightly from the previously released ‘flash’ estimate of 53.6, but up from 50.9 at the start of the third quarter. The upturn in operating conditions was only the second in as many months, following the easing of coronavirus disease 2019 (COVID-19) restrictions and the reopening of large sections of the manufacturing sector. Overall growth was solid and the sharpest since January 2019. Contributing to the overall expansion was a faster increase in new order inflows in August. The rate of growth was solid and the steepest since the start of 2019. Firms often linked the rise in new sales to stronger client demand and increased marketing. New export orders also picked up, as companies registered the first upturn in foreign client demand in 2020 so far. Moreover, the pace of increase was the quickest in four years
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From the Institute of Supply Management report:
Economic activity in the manufacturing sector grew in August, with the overall economy notching a fourth consecutive month of growth, 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 August PMI® registered 56 percent, up 1.8 percentage points from the July reading of 54.2 percent. This figure indicates expansion in the overall economy for the fourth month in a row after a contraction in April, which ended a period of 131 consecutive months of growth. The New Orders Index registered 67.6 percent, an increase of 6.1 percentage points from the July reading of 61.5 percent. The Production Index registered 63.3 percent, up 1.2 percentage points compared to the July reading of 62.1 percent. The Backlog of Orders Index registered 54.6 percent, an increase of 2.8 percentage points compared to the July reading of 51.8 percent. The Employment Index registered 46.4 percent, an increase of 2.1 percentage points from the July reading of 44.3 percent. The Supplier Deliveries Index registered 58.2 percent, up 2.4 percentage points from the July figure of 55.8 percent.
“The Inventories Index registered 44.4 percent, 2.6 percentage points lower than the July reading of 47 percent. The Prices Index registered 59.5 percent, up 6.3 percentage points compared to the July reading of 53.2 percent. The New Export Orders Index registered 53.3 percent, an increase of 2.9 percentage points compared to the July reading of 50.4 percent. The Imports Index registered 55.6 percent, a 2.5-percentage point increase from the July reading of 53.1 percent.
“After the coronavirus (COVID-19) brought manufacturing activity to historic lows, the sector continued its recovery in August, the first full month of operations after supply chains restarted and adjustments were made for employees to return to work. Survey Committee members reported that their companies and suppliers operated in reconfigured factories, with limited labor application due to safety restrictions. Panel sentiment was generally optimistic (1.4 positive comments for every cautious comment), though to a lesser degree compared to July. Demand expanded, with the (1) New Orders Index growing at very strong levels, supported by the New Export Orders Index expanding modestly; (2) Customers’ Inventories Index at its lowest figure since June 2010, a level considered a positive for future production, and (3) Backlog of Orders Index indicating growth for the second consecutive month. Consumption (measured by the Production and Employment indexes) contributed positively (a combined 3.3-percentage point increase) to the PMI® calculation, with industries continuing to expand output compared to July. Inputs — expressed as supplier deliveries, inventories and imports — were flat during the survey period, due to supplier delivery issues returning and import levels expanding moderately. Inventory levels contracted again due to strong production output and supplier delivery difficulties. Inputs likely were the biggest impediment to production growth and contributed negatively (a combined 0.2-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 expand and at higher rates, reflecting a shift to seller pricing power — a positive for new-order growth.
“Demand and consumption continued to drive expansion growth, with inputs representing near- and moderate-term supply chain difficulties. Among the six biggest manufacturing industries, Food, Beverage & Tobacco Products remains the best-performing sector, with Chemical Products; Computer & Electronic Products; and Fabricated Metal Products growing strongly. Transportation Equipment also expanded, but at a low rate. Petroleum & Coal Products sunk into contraction territory.
“Impacted by the current economic environment, many panelists’ companies are holding off on capital investments for the rest of 2020. In addition, (1) commercial aerospace equipment companies, (2) office furniture and commercial office building subsuppliers and (3) companies operating in the oil and gas markets — as well as their supporting supply bases — are and will continue to be impacted due to low demand. These companies represent approximately 20 percent of manufacturing output. This situation will likely continue at least through the end of the year,” says Fiore.
Of the 18 manufacturing industries, 15 reported growth in August, in the following order: Wood Products; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Textile Mills; Chemical Products; Computer & Electronic Products; Primary Metals; Fabricated Metal Products; Machinery; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Paper Products; and Transportation Equipment. The three industries reporting contraction in August are: Printing & Related Support Activities; Petroleum & Coal Products; and Furniture & Related 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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