Institute for Supply Management (ISM) surveys are noisy (month-to-month volatility). The December 2010 ISM Manufacturing Survey, which was down last month and up the month before that, is now up again by 0.4%.
The hard data for ISM Manufacturing is the Federal Reserve’s Industrial Production.
The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “The manufacturing sector continued its growth trend as indicated by this month’s report. We saw significant recovery for much of the U.S. manufacturing sector in 2010. The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle. Additionally, manufacturers that export have benefitted from both global demand and the weaker dollar. December’s strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go into the first quarter of 2011.”
Of the 18 manufacturing industries, 11 are reporting growth in December, in the following order: Apparel, Leather & Allied Products; Primary Metals; Fabricated Metal Products; Machinery; Computer & Electronic Products; Food, Beverage & Tobacco Products; Textile Mills; Plastics & Rubber Products; Transportation Equipment; Electrical Equipment, Appliances & Components; and Chemical Products. The four industries reporting contraction in December are: Nonmetallic Mineral Products; Paper Products; Printing & Related Support Activities; and Miscellaneous Manufacturing.
The ISM reports have too many bells and whistles if your intent is to understand the economy. The critical elements are new orders and backlog of orders. With new orders, you can understand whether the Purchasing Manager believes the order booking ledger is improving over the previous month. With backlog, you can understand if orders are coming in fast enough to support existing capacity.
While showing positive growth, the percentage of Purchasing Managers believing new orders were growing dropped back to August levels. This is one of the more noisy elements of the ISM manufacturing index. Some of the commentary from the headlines:
The 10 industries reporting growth in new orders in December — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Furniture & Related Products; Computer & Electronic Products; Machinery; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Miscellaneous Manufacturing; Food, Beverage & Tobacco Products; and Transportation Equipment. The four industries reporting decreases in new orders in December are: Nonmetallic Mineral Products; Paper Products; Chemical Products; and Printing & Related Support Activities.
Sadly, even with new orders – there is little correlation to Industrial Production. I am afraid the Purchasing Managers who are polled in this survey might not know much about how production is going.
This is a less noisy component of the ISM Manufacturing Index. The consensus is that backlog is contracting, and hard data so far has been supporting this view. Commentary from the headlines:
The six industries reporting increased order backlogs in December — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Furniture & Related Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; and Transportation Equipment. The six industries reporting decreases in order backlogs during December — listed in order — are: Paper Products; Nonmetallic Mineral Products; Printing & Related Support Activities; Chemical Products; Fabricated Metal Products; and Machine.
As backlog is the test of the health of industry, backlog should be growing if industry is healthy. As the purchasing managers are saying backlog is declining, it does not square with a ISM survey whose overall value is higher then the pre-recession period.