ISM Manufacturing Shows Expansion in October 2011 but Disappoints

The ISM Manufacturing survey index declined from 51.6 to 50.8 in October 2011 (50 separates manufacturing contraction and expansion).  This was below market expectations of 53.0.

Econintersect does not consider this index an accurate projection of the current situation in manufacturing or the economy (see caveats below).

Because it does not properly follow economic metrics does not say that this index is worthless – but care needs to be used in its use and your understanding of what the data is saying. Later in this post, you will see that there is a correlation between this survey’s new orders and recessions.

“The PMI registered 50.8 percent, a decrease of 0.8 percentage point from September’s reading of 51.6 percent, indicating expansion in the manufacturing sector for the 27th consecutive month. The New Orders Index increased 2.8 percentage points from September to 52.4 percent, indicating a return to growth after three months of contraction. The Prices Index, at 41 percent, dropped 15 percentage points, and is below the 50 percent mark for the first time since May 2009 when it registered 43.5 percent. Inventories decreased to 46.7 percent, which is 5.3 percentage points below the September reading of 52 percent. Comments from respondents are mixed, indicating positive relief from raw materials pricing and continuing strength in a few industries, but there is also more concern and caution about growth in this uncertain economy.”


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

It is interesting to note that the ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy.  Manufacturing employment in this ISM survey has been showing expansion – and yet the last two months manufacturing employment has contracted.  Historically, there is little linkage between real employment and the ISM employment index.

Imperfect but somewhat useful information is found in one of the sub-indices in ISM Manufacturing.  New orders have direct economic consequences – IF the opinions are accurate. Expanding new orders is not a sign a recession is imminent.

Beginning this month, Econintersect is no longer reviewing the backlog of orders, as there is a poor correlation between recessions and backlog.  In real data, backlog is falling when a recession hits.

Econintersect continues to believe that whether a recession is likely is still an open question.  However, based on the new orders component of ISM manufacturing – this metric is not indicating a recession.

Caveats on the use of ISM Manufacturing Index:

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.

Refer to Econintersect’s documentation of the poor ISM correlation to economic metrics (here).

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. These values define correlations as none to poor.

In other words, ISM employment index is not useful in understanding manufacturing jobs growth.

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