Marginal Improvement in ISM Manufacturing in September 2011

The ISM Manufacturing survey index improved from 50.6 to 51.6 in September 2011 and is sitting at 50.6 (50 separates manufacturing contraction and expansion).

Opinion surveys are useful for general impressions but Econintersect finds they do not end up being consistent compared to hard economic data that comes later, and usually miss economic turning points.

Nothing drives this point home better than looking at trend charts showing that the ISM survey was improving coming into two of the last three recessions:

I am not saying that this index is worthless – but care needs to be used in its use and your understanding of what the data is saying.  But one point is obvious looking at the graph – recent recessions have not occurred unless the ISM was negative year-over-year before the recession – and it is currently positive. Later in this post, you will see that there is a correlation between this survey’s new orders and recessions.

“The PMI registered 51.6 percent, an increase of 1 percentage point from August, indicating expansion in the manufacturing sector for the 26th consecutive month, at a slightly higher rate. The Production Index registered 51.2 percent, indicating a return to growth after contracting in August for the first time since May of 2009. The New Orders Index remained unchanged from August at 49.6 percent, indicating contraction for the third consecutive month. The Backlog of Orders Index decreased 4.5 percentage points to 41.5 percent, contracting for the fourth consecutive month and reaching its lowest level since April 2009, when it registered 40.5 percent. Comments from respondents generally reflect concern over the sluggish economy, political and policy uncertainty in Washington, and forecasts of ongoing high unemployment that will continue to put pressure on demand for manufactured products.”


Of the 18 manufacturing industries, 12 are reporting growth in September, in the following order: Wood Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Machinery; Miscellaneous Manufacturing; Transportation Equipment; Plastics & Rubber Products; Printing & Related Support Activities; Chemical Products; and Computer & Electronic Products. The six industries reporting contraction in September — listed in order — are: Primary Metals; Textile Mills; Furniture & Related Products; Fabricated Metal Products; Paper Products; and Electrical Equipment, Appliances & Components.

There are a lot of meaningless information (economically speaking) in the ISM survey. It is interesting to note that the ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy.  It is interesting to note manufacturing employment was thought to grow in September – we will find out this week how they do.  But historically, there is little linkage between real employment and the ISM employment index.

Econintersect has run correlation coefficients for the two 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.  These values define correlations as none to poor.

Better indicators are found elsewhere in the ISM report.  New orders and backlog of orders have direct economic consequences – IF the opinions are accurate. Contracting new orders cannot be a good sign – and based on past recessions has been an indicator a recession was starting. The graphs below are from our past analysis of the ISM manufacturing survey as the indexes for both new orders and backlog are still graphically correct.

Backlog is a poor indicator of an impending recession – but is used an indicator that an expansion is underway. We can definitely say this survey is not telling us we are in a period of strong growth.

Econintersect continues to believe that whether a recession is likely is still an open question. However, key indicators (which the ISM surveys are not among them) are not yet indicating a recession.

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