Written by Steven Hansen
The headlines say ISM Manufacturing survey is up, yet the trends in the economic intuitive elements of the survey continue to show a “less good” trend.
The ISM Manufacturing survey index (PMI) improved from 52.4 to 53.4 in March 2012 (50 separates manufacturing contraction and expansion). This was above expectations to the market which expected between 52.0 and 53.0.
Econintersect sees the new orders sub-index as having a higher and more precise correlation to recessions and the economy then the PMI overall. Although this subindex declined for the third month in a row, it remains solidly in expansion territory.
The three month trend shows the rate-of-growth is unchanged. Even the noisy Backlog of Orders -which also declined- remains solidly in expansion territory (backlog growth is an indicator of improving conditions).
“The PMI registered 53.4 percent, an increase of 1 percentage point from February’s reading of 52.4 percent, indicating expansion in the manufacturing sector for the 32nd consecutive month. The Production Index increased 3 percentage points from February’s reading of 55.3 percent to 58.3 percent, and the Employment Index increased 2.9 percentage points to 56.1 percent. Of the 18 industries included in the survey, 15 are experiencing overall growth. Comments from the panel remain positive, with several respondents citing increased sales and demand for the next few months.”
PERFORMANCE BY INDUSTRY – Of the 18 manufacturing industries, 15 are reporting growth in March, in the following order: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Primary Metals; Petroleum & Coal Products; Paper Products; Machinery; Miscellaneous Manufacturing; Wood Products; Furniture & Related Products; Transportation Equipment; Plastics & Rubber Products; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Fabricated Metal Products; and Electrical Equipment, Appliances & Components. The two industries reporting contraction in March are: Computer & Electronic Products; and Chemical Products.
It is interesting to note that 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. Expanding new orders is a relatively reliable sign a recession is NOT imminent. However, New Orders contraction have given false recession warnings twice since 2000.
Although the ISM Manufacturing New Orders says their is growth, growth is happening at a continuously “less good” rate. Manufacturing essentially has been driving the economic expansion, and it appears it is becoming a smaller part.
Caveats on the use of 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, ISM employment index is not useful in understanding manufacturing jobs growth. The graph below shows BLS manufacturing employment month-over-month gains against the ISM Manufacturing employment index.
The ISM employment index was right in predicting the direction of monthly manufacturing employment growth in 2011 about half the time.