Written by Steven Hansen
The ISM Manufacturing survey marginally declined but remains in expansion. The Markit PMI manufacturing index insignificantly 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 the same as 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 | 53.0 to 53.5 | 53.5 | 53.2 |
ISM Manufacturing | 54.0 to 57.0 | 56.3 | 56.0 |
From the Markit PMI Manufacturing Index:
Strongest improvement in operating conditions since January 20195.4
- Second-sharpest rise in employment since November 2019
- Business confidence moderates on election and virus uncertainty
- September PMITM data from IHS Markit indicated the sharpest improvement in operating conditions across the U.S. manufacturing sector since early-2019. Overall growth was supported by a faster expansion in production and a solid rise in new orders. As a result, firms continued to broaden their workforce numbers, as hiring increased following further upward pressure on capacity. Nonetheless, output expectations moderated in September amid increased uncertainty regarding the coronavirus disease 2019 (COVID-19) pandemic and the upcoming presidential election. Meanwhile, cost burdens rose sharply once again, with selling prices increasing at the fastest rate since January 2019.
- The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 53.2 in September, broadly in line with 53.1 seen in August, but down slightly from the earlier ‘flash’ reading of 53.5. The solid improvement in the health of the goods-producing sector was the steepest since January 2019, and signalled a further recovery from April’s nadir. Contributing to the overall upturn was a quicker rise in output at the end of the third quarter. The rate of growth was the sharpest for ten months and solid overall. A number of firms attributed the expansion to a further uptick in new orders and the resumption of operations at clients.
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From the Institute of Supply Management report:
Economic activity in the manufacturing sector grew in September, with the overall economy notching a fifth 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 September PMI® registered 55.4 percent, down 0.6 percentage point from the August reading of 56 percent. This figure indicates expansion in the overall economy for the fifth month in a row after a contraction in April, which ended a period of 131 consecutive months of growth. The New Orders Index registered 60.2 percent, a decrease of 7.4 percentage points from the August reading of 67.6 percent. The Production Index registered 61 percent, down 2.3 percentage points compared to the August reading of 63.3 percent. The Backlog of Orders Index registered 55.2 percent, 0.6 percentage point higher compared to the August reading of 54.6 percent. The Employment Index registered 49.6 percent, an increase of 3.2 percentage points from the August reading of 46.4 percent. The Supplier Deliveries Index registered 59 percent, up 0.8 percentage point from the August figure of 58.2 percent.
“The Inventories Index registered 47.1 percent, 2.7 percentage points higher than the August reading of 44.4 percent. The Prices Index registered 62.8 percent, up 3.3 percentage points compared to the August reading of 59.5 percent. The New Export Orders Index registered 54.3 percent, an increase of 1 percentage point compared to the August reading of 53.3 percent. The Imports Index registered 54 percent, a 1.6-percentage point decrease from the August reading of 55.6 percent.
“After the coronavirus (COVID-19) pandemic brought manufacturing activity to historic lows, the sector continued its recovery in September. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories and are becoming more proficient at maintaining output. Panel sentiment was optimistic (2.3 positive comments for every cautious comment), an improvement compared to August. Demand expanded, with the (1) New Orders Index growing at strong levels, supported by the New Export Orders Index expanding moderately, (2) Customers’ Inventories Index at its lowest figure since June 2010, a level considered a positive for future production, and the (3) Backlog of Orders Index expanding at a faster rate compared to the prior two months. Consumption (measured by the Production and Employment indexes) contributed positively (a combined 0.9-percentage point increase) to the PMI® calculation, with five of the top six industries continuing to expand output strongly. Employment neared expansion territory for the first time since July 2019. Inputs — expressed as supplier deliveries, inventories and imports — continued to indicate input-driven constraints to further production expansion, but at slower rates compared to August. Inventory levels contracted again due to strong production output and supplier delivery difficulties. Overall, inputs improved compared to August and contributed positively to the PMI® calculation. (The Supplier Deliveries and Inventories indexes directly factor into the PMI®; the Imports Index does not.) Prices continued to expand at higher rates, reflecting a continued shift to seller pricing power — a positive for new-order growth.
“Among the six biggest manufacturing industries, Food, Beverage & Tobacco Products remains the best-performing sector, with Fabricated Metal Products and Chemical Products growing strongly. Computer & Electronic Products and Transportation Equipment expanded moderately. Petroleum & Coal Products remained a headwind to PMI® performance.
“Manufacturing performed well in the month with demand, consumption and inputs registering growth indicative of a normal expansion cycle. While certain industry sectors are experiencing difficulties that will continue in the near term, the manufacturing community as a whole has learned to conduct business effectively and deal with the variables imposed by the COVID-19 pandemic,” says Fiore.
Of the 18 manufacturing industries, 14 reported growth in September, in the following order: Paper Products; Wood Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Electrical Equipment, Appliances & Components; Nonmetallic Mineral Products; Fabricated Metal Products; Chemical Products; Miscellaneous Manufacturing; Plastics & Rubber Products; Machinery; Textile Mills; Computer & Electronic Products; and Transportation Equipment. The four industries reporting contraction in September are: Apparel, Leather & Allied Products; Printing & Related Support Activities; Petroleum & Coal Products; and Primary Metals.
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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