Written by Steven Hansen
The ISM Manufacturing survey declined but remains in expansion. The Markit PMI manufacturing index improved and remains in expansion. The index value of ISM and Markit are similar.
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 | 56.5 to 59.1 | 58.0 | 59.2 |
ISM Manufacturing | 59.0 to 61.5 | 60.0 | 58.7 |
From the Markit PMI Manufacturing Index:
Operating conditions improve at fastest pace since September 2014
- Marked improvement in operating conditions as PMI climbs to survey high
- Near-record supply chain disruptions push up input costs
- Prices charged rise at steepest pace since July 2008
- January PMITM data from IHS Markit indicated a robust improvement in the health of the U.S. manufacturing sector. Alongside a severe deterioration in vendor performance, the headline figure was pushed up to a record high by accelerated expansions in output and new orders. Meanwhile, cost pressures intensified amid raw material shortages. Firms were able to partially pass on higher costs, however, with selling prices rising at the fastest pace since July 2008. Robust business confidence was reflected in the strongest rise in workforce numbers for two years, as pressure on capacity increased once again.
- The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 59.2 in January, up from 57.1 in December and broadly in line with the earlier released ‘flash’ figure of 59.1. The latest data signalled a substantial improvement in operating conditions among manufacturers, and the most marked since data collection began in May 2007. Output increased steeply at the start of 2021, as the rate of growth quickened to the fastest since August 2014. The rise in production was often attributed by panellists to stronger client demand and a sharper increase in new orders.
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From the Institute of Supply Management report:
Economic activity in the manufacturing sector grew in January, with the overall economy notching an eighth 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 January Manufacturing PMI® registered 58.7 percent, down 1.8 percentage points from the seasonally adjusted December reading of 60.5 percent. This figure indicates expansion in the overall economy for the eighth month in a row after contraction in March, April, and May. The New Orders Index registered 61.1 percent, down 6.4 percentage points from the seasonally adjusted December reading of 67.5 percent. The Production Index registered 60.7 percent, a decrease of 4 percentage points compared to the seasonally adjusted December reading of 64.7 percent. The Backlog of Orders Index registered 59.7 percent, 0.6 percentage point above the December reading of 59.1 percent. The Employment Index registered 52.6 percent, 0.9 percentage point higher from the seasonally adjusted December reading of 51.7 percent. The Supplier Deliveries Index registered 68.2 percent, up 0.5 percentage point from the December figure of 67.7 percent. The Inventories Index registered 50.8 percent, 0.2 percentage point lower than the seasonally adjusted December reading of 51 percent. The Prices Index registered 82.1 percent, up 4.5 percentage points compared to the December reading of 77.6 percent. The New Export Orders Index registered 54.9 percent, a decrease of 2.6 percentage points compared to the December reading of 57.5 percent. The Imports Index registered 56.8 percent, a 2.2-percentage point increase from the December reading of 54.6 percent.”
Fiore continues, “The manufacturing economy continued its recovery in January. Survey committee members reported that their companies and suppliers continue to operate in reconfigured factories, but absenteeism, short-term shutdowns to sanitize facilities and difficulties in returning and hiring workers are continuing to cause strains that limit manufacturing growth potential. However, panel sentiment remains optimistic (three positive comments for every cautious comment), similar to December levels. Demand expanded, with the (1) New Orders Index growing at a strong level, supported by the New Export Orders Index expanding, (2) Customers’ Inventories Index remaining in ‘too low’ territory and at a level considered a positive for future production, and the (3) Backlog of Orders Index remaining at high levels. Consumption (measured by the Production and Employment indexes) contributed negatively (a combined 3.1-percentage point decrease) to the Manufacturing PMI® calculation. Five of the top six industries reported moderate to strong expansion. The Employment Index expanded for a second straight month, but panelists continue to note difficulties in attracting and retaining labor at their companies and supplier facilities. Inputs — expressed as supplier deliveries, inventories and imports — continued to indicate input-driven constraints to production expansion, at higher rates compared to December, as indicated by minimal gains in inventory levels and declining supplier performance. Imports expanded in the period, despite port backlogs, but not at levels desired by panelists. Supplier delivery struggles continued, contributing moderately to the Manufacturing PMI® calculation. (The Supplier Deliveries and Inventories indexes directly factor into the Manufacturing PMI®; the Imports Index does not.) The Prices Index surged dramatically in January, hitting a level last reached in April 2011, indicating continued supplier pricing power.
“Of the six biggest manufacturing industries, five — Chemical Products; Fabricated Metal Products; Transportation Equipment; Food, Beverage & Tobacco Products; and Computer & Electronic Products — registered moderate to strong growth in January. Petroleum & Coal Products contracted.
“Manufacturing performed well for the eighth straight month, with demand, consumption and inputs registering strong growth compared to December. Labor market difficulties at panelists’ companies and their suppliers will continue to restrict the manufacturing economy expansion until the coronavirus (COVID-19) crisis abates,” says Fiore.
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 the 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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