May 2019 ISM and Markit Manufacturing Surveys Show Weak Growth

The ISM Manufacturing survey declined but continued in expansion. The key internals were mixed. The Markit PMI manufacturing Index remained barely in positive territory and declined.

Analyst Opinion of the Manufacturing Surveys

Based on these surveys and the district Federal Reserve Surveys, one would expect the Fed's Industrial Production index growth rate to be around the same level of growth as last month. Overall, surveys do not have a high correlation to the movement of industrial production (manufacturing) since the Great Recession. The ISM and Markit manufacturing surveys were similar this month.

From Econoday:

From the Markit PMI Manufacturing Index:

Solid rise in new orders drives further improvement in operating conditions

• Marginal improvement in operating conditions
• New orders fall for first time since August 2009
• Output expectations dip to joint-lowest in series history
• May survey data signalled only a marginal improvement in the health of the U.S. manufacturing sector. The headline PMI fell to its lowest level since September 2009 as output growth eased and new orders fell for the first time since August 2009. Weak demand conditions and ongoing trade tensions led firms to express the joint-lowest degree of confidence regarding future output growth since data on the outlook were first collected in mid-2012. At the same time, employment rose at the slowest rate since March 2017 and backlogs of work were unchanged. Meanwhile, inflationary pressures eased further, with both input costs and output prices increasing at softer rates.
• The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers' Index™ (PMI™) posted 50.5 in May, down from 52.6 in April. The latest headline figure signalled only a slight improvement in operating conditions, with the latest reading the lowest since September 2009. The data for the second quarter so far have indicated a distinct slowdown in the manufacturing sector compared to the first three months of 2019.

From the Institute of Supply Management report:

Economic activity in the manufacturing sector expanded in May, and the overall economy grew for the 121st 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 52.1 percent, a decrease of 0.7 percentage point from the April reading of 52.8 percent. The New Orders Index registered 52.7 percent, an increase of 1 percentage point from the April reading of 51.7 percent. The Production Index registered 51.3 percent, a 1-percentage point decrease compared to the April reading of 52.3 percent. The Employment Index registered 53.7 percent, an increase of 1.3 percentage points from the April reading of 52.4 percent. The Supplier Deliveries Index registered 52 percent, a 2.6-percentage point decrease from the April reading of 54.6 percent. The Inventories Index registered 50.9 percent, a decrease of 2 percentage points from the April reading of 52.9 percent. The Prices Index registered 53.2 percent, a 3.2-percentage point increase from the April reading of 50 percent.

"Comments from the panel reflect continued expanding business strength, but at soft levels consistent with the early-2016 expansion. Demand expansion continued, with the New Orders Index strengthening, but remaining in the low 50s, the Customers' Inventories Index remaining at a 'too low' level, and the Backlog of Orders Index contracting for the first time since January 2017. Consumption (production and employment) continued to expand, resulting in a combined PMI® contribution of 0.3 percentage point. Inputs — expressed as supplier deliveries, inventories and imports — were lower this month, primarily due to inventory softening and supplier's continuing to deliver faster, resulting in a combined 4.6-percentage point reduction in the Supplier Deliveries and Inventories indexes. Imports contracted for the second straight month. Overall, inputs reflect supply chains' ability to respond faster and indicate that supply managers are closely watching inventories. Prices remain at a relatively stable level.

"Respondents expressed concern with the escalation in the U.S.-China trade standoff, but overall sentiment remained predominantly positive. The PMI® continues to reflect slowing expansion," says Fiore.

Of the 18 manufacturing industries, 11 reported growth in May, in the following order: Printing & Related Support Activities; Furniture & Related Products; Plastics & Rubber Products; Textile Mills; Miscellaneous Manufacturing; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Chemical Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; and Machinery. The six industries reporting contraction in May — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Petroleum & Coal Products; Wood Products; Paper Products; and Fabricated Metal Products.

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

Readings above 50 in the ISM manufacturing index signal month-to-month growth for U.S. manufacturing as a whole, while those below 50 indicate monthly contraction. For the economy as a whole, readings above 60 signal national GDP growth of 5 percent, while those below 43 signal GDP contraction.

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 the 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, the 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.