February 2021 ISM and Markit Manufacturing Surveys Mixed

Written by Steven Hansen

The ISM Manufacturing survey improved and remains in expansion. The Markit PMI manufacturing index marginally declined but remains in expansion. The index value of ISM and Markit are similar.

From Econoday:

From the Markit PMI Manufacturing Index:

Operating conditions improve at fastest pace since September 2014

• Steep expansions in output and new orders
• Costs rise at steepest rate since April 2011 amid record supplier shortages
• Selling prices increase at sharpest pace since July 2008
• February PMITM data from IHS Markit indicated a marked upturn in the health of the U.S. manufacturing sector. Although the rate of overall growth eased, it was the second-fastest since April 2010 and was supported by sharp increases in output and new orders. Unprecedented supply chain disruption remained apparent, however, with supplier shortages and transportation delays leading to a substantial rise in input costs. Firms were, however, able to partially pass on input prices to clients through the fastest increase in charges since July 2008. At the same time, employment grew at the steepest rate since September 2014, as business confidence also improved.
• The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 58.6 in February, down from 59.2 in January but broadly in line with the earlier released ‘flash’ estimate of 58.5. The marked improvement in the health of the manufacturing sector was the secondstrongest in almost 11 years. Despite easing, rates of expansion in output and new orders remained sharp overall in February. The rate of production growth was among the fastest in six years while new order growth was among the fastest seen over the past three years. New export orders also rose solidly, registering the secondsteepest gain since September 2014.

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From the Institute of Supply Management report:

Economic activity in the manufacturing sector grew in February, with the overall economy notching a ninth 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 February Manufacturing PMI® registered 60.8 percent, an increase of 2.1 percentage points from the January reading of 58.7 percent. This figure indicates expansion in the overall economy for the ninth month in a row after contraction in March, April, and May. The New Orders Index registered 64.8 percent, up 3.7 percentage points from the January reading of 61.1 percent. The Production Index registered 63.2 percent, an increase of 2.5 percentage points compared to the January reading of 60.7 percent. The Backlog of Orders Index registered 64 percent, 4.3 percentage points above the January reading of 59.7 percent. The Employment Index registered 54.4 percent, 1.8 percentage points higher from the January reading of 52.6 percent. The Supplier Deliveries Index registered 72 percent, up 3.8 percentage points from the January figure of 68.2 percent. The Inventories Index registered 49.7 percent, 1.1 percentage points lower than the January reading of 50.8 percent. The Prices Index registered 86 percent, up 3.9 percentage points compared to the January reading of 82.1 percent. The New Export Orders Index registered 57.2 percent, an increase of 2.3 percentage points compared to the January reading of 54.9 percent. The Imports Index registered 56.1 percent, a 0.7-percentage point decrease from the January reading of 56.8 percent.”

Fiore continues, “The manufacturing economy continued its recovery in February. Survey Committee members reported that their companies and suppliers continue to operate in reconfigured factories. Issues with absenteeism, short-term shutdowns to sanitize facilities, and difficulties in hiring workers remain challenges and continue to cause strains that limit manufacturing-growth potential. Optimistic panel sentiment increased, with five positive comments for every cautious comment, compared to a 3-to-1 ratio in January. Demand expanded, with the (1) New Orders Index growing at a strong level, supported by the New Export Orders Index expanding at a faster rate, (2) Customers’ Inventories Index remaining in ‘too low’ territory (at 32.5 percent, tying its all-time low), and the (3) Backlog of Orders Index growing 4.3 percentage points compared to January. Consumption (measured by the Production and Employment indexes) contributed positively (a combined 4.3-percentage point increase) to the Manufacturing PMI® calculation. Five of the top six industries reported moderate to strong expansion. The Employment Index expanded for the third straight month, but panelists continue to note significant 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 January, as indicated by the Inventories Index returning to contraction territory and another month of slowing supplier delivery performance. Imports marginally slowed in the period, driven by port backlogs. The Prices Index expanded for the ninth consecutive month, indicating continued supplier pricing power and scarcity of supply chain goods.

“Of the six biggest manufacturing industries, five — Chemical Products; Fabricated Metal Products; Transportation Equipment; Computer & Electronic Products; and Food, Beverage & Tobacco Products — registered strong growth in February. Petroleum & Coal Products moderately contracted.

“Manufacturing performed well for the ninth straight month, with demand, consumption and inputs registering strong growth compared to January. Labor-market difficulties at panelists’ companies and their suppliers continued to restrict manufacturing-economy expansion and will remain the primary headwind to production growth until employment levels and factory operations can return to normal across the entire supply chain,” says Fiore.

Of the 18 manufacturing industries, 16 reported growth in February, in the following order: Textile Mills; Electrical Equipment, Appliances & Components; Primary Metals; Paper Products; Chemical Products; Machinery; Fabricated Metal Products; Transportation Equipment; Wood Products; Plastics & Rubber Products; Computer & Electronic Products; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Furniture & Related Products; and Nonmetallic Mineral Products. The two industries reporting contraction in February are: Printing & Related Support Activities; and Petroleum & Coal 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 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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