May 2017 Manufacturing Survey Growth Mixed

The ISM Manufacturing survey marginally improved and remained in expansion. The key internals were mixed but in expansion. The Markit PMI manufacturing Index, also released today, is in positive territory and marginally declined.

Analyst Opinion of the ISM Manufacturing Survey

ISM manufacturing index movements have correlated with Industrial Production Manufacturing index only half the time in the last 12 months. Based on this survey and the weak district Federal Reserve Surveys, one would expect the Fed's Industrial Production index to beunchanged in May. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession.

From Bloomberg / Econoday:

From the Markit PMI Manufacturing Index:

Manufacturing PMI slips to eight-month low in May

• Moderate improvement in overall business conditions
• New orders rise at slowest pace since September 2016
• Input cost inflation eases to six-month low
• U.S. manufacturing companies indicated an upturn in business conditions during May, but the latest survey revealed a further loss of momentum from the peak seen at the beginning of 2017. The softer overall improvement in manufacturing conditions reflected a moderation in new business growth to its weakest for eight months, alongside relatively subdued increases in output and employment. May data also pointed to more cautious inventory policies, with stocks of purchases falling at the fastest pace since August 2016.
• At 52.7 in May, down fractionally from 52.8 in April, the seasonally adjusted IHS Markit final US Manufacturing Purchasing Managers' Index™ (PMI™) was above the 50.0 no-change value, but signalled the weakest improvement in business conditions since last September. The latest reading pointed to a further growth slowdown from the 22- month high recorded in January (55.0). Weaker new business growth and softer job creation helped to offset a marginally stronger upturn in production volumes.

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

The noisy Backlog of Orders improved and remains in expansion. Backlog growth should be an indicator of improving conditions; a number below 50 indicates contraction. Backlog accuracy does not have a high correlation against actual data.

Excepts from the ISM release:

Economic activity in the manufacturing sector expanded in May, and the overall economy grew for the 96th 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 May PMI® registered 54.9 percent, an increase of 0.1 percentage point from the April reading of 54.8 percent. The New Orders Index registered 59.5 percent, an increase of 2 percentage points from the April reading of 57.5 percent. The Production Index registered 57.1 percent, a 1.5 percentage points decrease compared to the April reading of 58.6 percent. The Employment Index registered 53.5 percent, an increase of 1.5 percentage points from the April reading of 52 percent. The Inventories Index registered 51.5 percent, an increase of 0.5 percentage point from the April reading of 51 percent. The Prices Index registered 60.5 percent in May, a decrease of 8 percentage points from the April reading of 68.5 percent, indicating higher raw materials prices for the 15th consecutive month, but at a noticeably slower rate of increase in May compared with April. Comments from the panel generally reflect stable to growing business conditions, with new orders, employment and inventories of raw materials all growing in May compared to April. The slowing of pricing pressure, especially in basic commodities, should have a positive impact on margins and buying policies as this moderation moves up the value chain."

Of the 18 manufacturing industries, 15 reported growth in May in the following order: Nonmetallic Mineral Products; Furniture & Related Products; Plastics & Rubber Products; Machinery; Primary Metals; Food, Beverage & Tobacco Products; Electrical Equipment, Appliances & Components; Paper Products; Miscellaneous Manufacturing; Computer & Electronic Products; Transportation Equipment; Chemical Products; Fabricated Metal Products; Petroleum & Coal Products; and Printing & Related Support Activities. Two industries reported contraction in May compared to April: Apparel, Leather & Allied Products; and Textile Mills.

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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.