August 2018 Manufacturing Survey Growth Trends Down

The ISM Manufacturing survey improved but continued in expansion. The key internals are in expansion. The Markit PMI manufacturing Index is in positive territory but declined.

Analyst Opinion of the ISM Manufacturing Survey

Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed's Industrial Production index growth rate remain about the same as last month. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession. This month the ISM survey went up and the Markit survey down - go figure.

From Nasdaq / Econoday:

From the Markit PMI Manufacturing Index:

PMI dips to five-month low in July

• PMI indicates strong improvement in operating conditions
• Rates of output and new order growth ease but remain solid
• Inflationary pressures soften
• August data indicated a strong overall improvement in the health of the U.S. manufacturing sector. The upturn was supported by further rises in output and new orders, and a renewed increase in export sales. That said, production rose at the weakest rate for almost a year. The latest upturn in new business drove solid increases in employment and backlogs. Meanwhile, rates of both input price and output charge inflation softened to six- and five-month lows, respectively. On a positive note, business confidence improved and reached a three-month high.
• The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers' Index™ (PMI™) registered 54.7 in August, down from 55.3 in July. Although signalling the weakest improvement in operating conditions since last November, the PMI indicated a strong overall manufacturing performance. Moreover, the latest figure remained well above the long-run series average.

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From the Institute of Supply Management report:

Economic activity in the manufacturing sector expanded in August, and the overall economy grew for the 112th consecutive month, say the nation's supply executives in the latest Manufacturing ISM® Report On Business®.

The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: "The August PMI® registered 61.3 percent, an increase of 3.2 percentage points from the July reading of 58.1 percent. The New Orders Index registered 65.1 percent, an increase of 4.9 percentage points from the July reading of 60.2 percent. The Production Index registered 63.3 percent, a 4.8-percentage point increase compared to the July reading of 58.5 percent. The Employment Index registered 58.5 percent, an increase of 2 percentage points from the July reading of 56.5 percent. The Supplier Deliveries Index registered 64.5 percent, a 2.4-percentage point increase from the July reading of 62.1 percent. The Inventories Index registered 55.4 percent, an increase of 2.1 percentage points from the July reading of 53.3 percent. The Prices Index registered 72.1 percent in August, a 1.1-percentage point decrease from the July reading of 73.2 percent, indicating higher raw materials prices for the 30th consecutive month.

"Comments from the panel reflect continued expanding business strength. Demand remains strong, with the New Orders Index at 60 percent or above for the 16th straight month, and the Customers' Inventories Index remaining low. The Backlog of Orders Index continued to expand, at higher levels compared to the previous month. Consumption improved, with production and employment continuing to expand, at higher levels compared to July, despite shortages in labor and materials. Inputs (expressed as supplier deliveries, inventories and imports) expanded strongly due to continuing supply chain inefficiencies, positive increases in inventory levels and a slight easing of imports. Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue, but at more manageable levels.

"Export orders expanded at stable levels. Prices pressure continues, but the index softened for the third straight month and remains above 70. Demand is still robust, but the nation's employment resources and supply chains continue to struggle. Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Panelists are actively evaluating how to respond to these business changes, given the uncertainty," says Fiore.

Of the 18 manufacturing industries, 16 reported growth in August, in the following order: Computer & Electronic Products; Apparel, Leather & Allied Products; Textile Mills; Paper Products; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Furniture & Related Products; Machinery; Nonmetallic Mineral Products; Transportation Equipment; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Plastics & Rubber Products; Fabricated Metal Products; Chemical Products; and Printing & Related Support Activities. The two industries reporting contraction in August are: Wood Products; and Primary Metals.

Relatively deep penetration of this index below 50 has normally resulted in a recession.

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It is interesting to note that ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy. Historically, it could be argued that the production portion of ISM Manufacturing leads the Fed's Industrial Production index - however the correlation is not strong when looking at trends.

However, holding this and other survey's Econintersect follows accountable for their predictions, the following graph compares the hard data from Industrial Products manufacturing subindex (blue bar) and US Census manufacturing shipments (red bar) to the ISM Manufacturing Survey (purple bar).

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 ISM employment index appears useful in predicting turning points which can lead the BLS data up to one year.