Written by Steven Hansen
The ISM Manufacturing survey for April 2012 (released today) points to an improving economy.
The ISM Manufacturing survey index (PMI) improved from 53.4 to 54.8 (50 separates manufacturing contraction and expansion). This was above expectations to the market which expected between 52.5 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. This subindex expanded dramatically reversing the declines of the last three months, and remains solidly in expansion territory.
The noisy Backlog of Orders degraded markedly to 49.5 from 53.0 last month. Backlog growth is an indicator of improving conditions; a number below 50 indicates contraction.
“The PMI registered 54.8 percent, an increase of 1.4 percentage points from March’s reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month. Sixteen of the 18 industries reflected overall growth in April, and the New Orders, Production and Employment Indexes all increased, indicating growth at faster rates than in March. The Prices Index for raw materials remained at 61 percent in April, the same rate as reported in March. Comments from the panel generally indicate stable to strong demand, with some concerns cited over increasing oil prices and European stability.”
PERFORMANCE BY INDUSTRY – Of the 18 manufacturing industries, 16 are reporting growth in April, in the following order: Furniture & Related Products; Printing & Related Support Activities; Machinery; Nonmetallic Mineral Products; Miscellaneous Manufacturing; Primary Metals; Paper Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Plastics & Rubber Products; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Chemical Products; Fabricated Metal Products; Computer & Electronic Products; and Petroleum & Coal Products. The only industry reporting contraction in April is Wood 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.
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.