Written by Steven Hansen
The ISM Manufacturing survey insignificantly declined but remains in expansion. The Markit PMI manufacturing index was unchanged 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 about 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 | 62.0 to 62.6 | 62.6 | 62.1 |
ISM Manufacturing | 59.5 to 62.0 | 61.1 | 60.6 |
From the Markit PMI Manufacturing Index:
Output growth eases as supply-chain disruption worsens, despite marked rise in client demand
- Pressure on capacity weighs on production growth
- Supplier delivery times lengthen to greatest extent on record
- Input cost inflation hits fresh series record
- June PMITM data from IHS Markit signalled the joint-fastest improvement in the health of the U.S. manufacturing sector on record. The upturn was supported by further marked expansions in output and new orders, but supply chain disruptions worsened and weighed on production capacity. Vendor performance deteriorated to the greatest extent on record. Input costs meanwhile showed the largest jump on record, feeding through to another record rise in factory selling prices. Hopes of a sustained period of strong client demand strengthened output expectations, as the degree of confidence reached a sevenmonth high.
- The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 62.1 in June, unchanged on May, but slipping slightly from the earlier released ‘flash’ estimate of 62.6. The marked improvement in operating conditions was the joint-strongest since data collection began in May 2007. New orders growth remained substantial in June, despite the rate of expansion easing from May’s historic high. The pace of increase was the second-fastest on record, with firms continuing to note marked upturns in demand from both new and existing clients. Some companies also stated that the further relaxation of COVID-19 restrictions encouraged customers to expand their activity. New export orders meanwhile rose solidly in June, albeit at the softest pace for three months.
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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 13th 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 June Manufacturing PMI® registered 60.6 percent, a decrease of 0.6 percentage point from the May reading of 61.2 percent. This figure indicates expansion in the overall economy for the 13th month in a row after contraction in April 2020. The New Orders Index registered 66 percent, decreasing 1 percentage point from the May reading of 67 percent. The Production Index registered 60.8 percent, an increase of 2.3 percentage points compared to the May reading of 58.5 percent. The Prices Index registered 92.1 percent, up 4.1 percentage points compared to the May figure of 88 percent and the index’s highest reading since July 1979 (93.1 percent). The Backlog of Orders Index registered 64.5 percent, 6.1 percentage points lower than the May reading of 70.6 percent. The Employment Index registered 49.9 percent; 1 percentage point lower compared to the May reading of 50.9 percent. The Supplier Deliveries Index registered 75.1 percent, down 3.7 percentage points from the May figure of 78.8 percent. The Inventories Index registered 51.1 percent, 0.3 percentage point higher than the May reading of 50.8 percent. The New Export Orders Index registered 56.2 percent, an increase of 0.8 percentage point compared to the May reading of 55.4 percent. The Imports Index registered 61 percent, a 7-percentage point increase from the May reading of 54 percent.”
Fiore continues, “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential. Optimistic panel sentiment remained strong, with 16 positive comments for every cautious comment. Demand expanded, with the (1) New Orders Index growing, supported by the New Export Orders Index continuing to expand, (2) Customers’ Inventories Index continuing at very low levels and (3) Backlog of Orders Index continuing at a very high level. Consumption (measured by the Production and Employment indexes) improved in the period, posting a combined 1.3-percentage point increase to the Manufacturing PMI® calculation. The Employment Index, which held back further expansion, contracted after six straight months of expansion, as panelists continued to note significant difficulties in attracting and retaining labor at their companies’ and suppliers’ facilities. Inputs — expressed as supplier deliveries, inventories, and imports — continued to support input-driven constraints to production expansion, at higher rates compared to May, due to continued trouble in supplier deliveries. The Prices Index expanded for the 13th consecutive month, indicating continued supplier pricing power and scarcity of supply chain goods.
“All of the six biggest manufacturing industries — Computer & Electronic Products; Chemical Products; Fabricated Metal Products; Transportation Equipment; Food, Beverage & Tobacco Products; and Petroleum & Coal Products, in that order — registered moderate to strong growth in June.
“Manufacturing performed well for the 13th straight month, with demand, consumption and inputs registering growth compared to May. Panelists’ companies and their supply chains continue to struggle to respond to strong demand due to the difficulty in hiring and retaining direct labor. Continued high backlog levels, too low customers’ inventories and record raw-materials lead times are being reported. Labor challenges across the entire value chain continue to be the major obstacles to increasing growth,” says Fiore. Seventeen of 18 manufacturing industries reported growth in June, in the following order: Furniture & Related Products; Machinery; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Plastics & Rubber Products; Chemical Products; Fabricated Metal Products; Transportation Equipment; Miscellaneous Manufacturing; Nonmetallic Mineral Products; Textile Mills; Primary Metals; Food, Beverage & Tobacco Products; Paper Products; Printing & Related Support Activities; Wood Products; and Petroleum & Coal Products. No industry reported a decrease in June.
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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