ISM Manufacturing Rose Above Expectations in November 2011

The ISM Manufacturing survey index improved from 50.8 to 52.7 in November 2011 (50 separates manufacturing contraction and expansion).  The market expected between 50.5 and 51.0.

Econintersect does not consider this index an accurate projection of the current situation in manufacturing or the economy (see caveats below).  However, the sub-index for new orders does have good correlation to recessions and improved strongly this month.

“The PMI registered 52.7 percent, an increase of 1.9 percentage points from October’s reading of 50.8 percent, indicating expansion in the manufacturing sector for the 28th consecutive month. The New Orders Index increased 4.3 percentage points from October to 56.7 percent, reflecting the second month of growth after three months of contraction. While the Prices Index, at 45 percent, increased 4 percentage points from the October reading of 41 percent, prices of raw materials continued to decrease (registering below 50 percent) for the second consecutive month. Respondents cite continuing concerns about the general economic environment, government regulations and European financial conditions, but are cautiously more optimistic about the next few months based on lower raw materials pricing and favorable levels of new orders.”


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

It is interesting to note that the ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy.  Historically, there is little linkage between real employment and the ISM employment index.

New orders have direct economic consequences – IF the opinions are accurate. Expanding new orders is not a sign a recession is imminent.  New Orders have given false recession warnings twice since 2000.

Based on the new orders component of ISM manufacturing – this metric is not indicating a recession is imminent.

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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