ISM Manufacturing Index: An August Dip Into Contraction
Today the Institute for Supply Management published its monthly Manufacturing Report for August. The latest headline PMI was 49.4 percent, a surprising large decline of 3.2 percent from the previous month and below the Investing.com forecast of 52.0 percent.
Here is the key analysis from the report:
"The July PMI® registered 52.6 percent, a decrease of 0.6 percentage point from the June reading of 53.2 percent. The New Orders Index registered 56.9 percent, a decrease of 0.1 percentage point from the June reading of 57 percent. The Production Index registered 55.4 percent, 0.7 percentage point higher than the June reading of 54.7 percent. The Employment Index registered 49.4 percent, a decrease of 1 percentage point from the June reading of 50.4 percent. Inventories of raw materials registered 49.5 percent, an increase of 1 percentage point from the June reading of 48.5 percent. The Prices Index registered 55 percent, a decrease of 5.5 percentage points from the June reading of 60.5 percent, indicating higher raw materials prices for the fifth consecutive month. Manufacturing registered growth in July for the fifth consecutive month, as 12 of our 18 industries reported an increase in new orders in July (same as in June), and nine of our 18 industries reported an increase in production in July (down from 12 in June)."
Here is the table of PMI components.
The ISM Manufacturing Index should be viewed with a bit of skepticism for for various reasons, which are essentially captured in Briefing.com's Big Picture comment on this economic indicator.
This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.
The chart below shows the Manufacturing Composite series, which stretches back to 1948. The eleven recessions during this time frame are indicated along with the index value the month before the recession starts.
For a diffusion index, the latest reading of 49.4 ended five consecutive months of expansion. What sort of correlation does that have with the months before the start of recessions? Check out the red dots in the chart above.
How revealing is today's 3.2 point change from last month? There are 824 monthly data points in this series. The absolute average month-to-month point change is 2.0 points, and the median change is 1.5 points.
Here is a closer look at the series beginning at the turn of the century.
To reiterate the Briefing.com assessment: "The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle." The ISM reports nevertheless offer an interesting sidebar to the ongoing economic debate.
Note: This commentary used the FRED USRECP series (Peak through the Period preceding the Trough) to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The USRECP series thus flags December 2007 as the start of the recession and May 2009 as the last month of the recession, giving us the 18-month duration. The dot for the last recession in the charts above are thus for November 2007. The "Peak through the Period preceding the Trough" series is the one FRED uses in its monthly charts, as illustrated here.