September 2018 Manufacturing Survey Growth Trends Mixed

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

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 down and the Markit survey up - go figure.

From Econoday:

From the Markit PMI Manufacturing Index:

Output and new order growth gains momentum in September

• PMI rises to four-month high
• Steeper increases in production and new business
• Backlogs expand at joint-fastest rate for three years
• September data indicated a strong improvement in operating conditions across the U.S. manufacturing sector. The overall performance was driven by sharper rises in output and new orders, though new business from abroad continued to expand at only a marginal pace. A faster increase in new orders contributed to greater capacity pressures, with backlogs accumulating at the joint-fastest rate since September 2015.
• Meanwhile, input prices continued to increase sharply. Components shortages and increased demand for inputs reportedly pushed purchase costs higher. Firms were able to partly pass greater costs onto clients through a solid rise in charges. The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers' Index™ (PMI™) registered 55.6 in September, up from 54.7 in August. The headline figure rose to a four-month high and was well above the series trend. Although the average for the third quarter was strong overall, it signalled the softest expansion since the fourth quarter of 2017.

z markit_pmi.PNG

From the Institute of Supply Management report:

Economic activity in the manufacturing sector expanded in September, and the overall economy grew for the 113th 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 September PMI®registered 59.8 percent, a decrease of 1.5 percentage points from the August reading of 61.3 percent. The New Orders Index registered 61.8 percent, a decrease of 3.3 percentage points from the August reading of 65.1 percent. The Production Index registered 63.9 percent, a 0.6 percentage point increase compared to the August reading of 63.3 percent. The Employment Index registered 58.8 percent, an increase of 0.3 percentage point from the August reading of 58.5 percent. The Supplier Deliveries Index registered 61.1 percent, a 3.4-percentage point decrease from the August reading of 64.5 percent. The Inventories Index registered 53.3 percent, a decrease of 2.1 percentage points from the August reading of 55.4 percent. The Prices Index registered 66.9 percent in September, a 5.2-percentage point decrease from the August reading of 72.1 percent, indicating higher raw materials prices for the 31st 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 17th straight month, and the Customers' Inventories Index remaining low. The Backlog of Orders Index continued to expand, but at lower levels compared to the previous month. Consumption improved, with production and employment continuing to expand, at higher levels compared to August, despite shortages in labor and materials. Inputs — expressed as supplier deliveries (decreased), inventories and imports — improved compared to the previous month's activity. But continued supply chain inefficiencies led to an increased consumption of inventory and a slight expansion of imports, which adequately supported production output. Lead-time extensions, steel and aluminum disruptions, supplier labor issues, and transportation difficulties continue to limit potential, but at more manageable levels.

"Export orders expanded, but four major industries are no longer contributing. Price pressure continues, but the index softened for the fourth straight month and dropped below 70 for the first time since December 2017. Demand remains robust, but employment resources and supply chains continue to struggle, but to a lesser degree. Respondents are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations," says Fiore.

Of the 18 manufacturing industries, 15 reported growth in September, in the following order: Textile Mills; Miscellaneous Manufacturing; Plastics & Rubber Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; Machinery; Apparel, Leather & Allied Products; Paper Products; Electrical Equipment, Appliances & Components; Chemical Products; Petroleum & Coal Products; Transportation Equipment; Furniture & Related Products; Fabricated Metal Products; and Nonmetallic Mineral Products. The only industry reporting contraction in September is Primary Metals.

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

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.