ISM Manufacturing Index: Continued Expansion in November

Today the Institute for Supply Management published its monthly Manufacturing Report for November. The latest headline Purchasing Managers Index (PMI) was 53.2 percent, an increase of 1.3 percent from 51.9 previous month. Today's headline number was above the Investing.com forecast of 52.2 percent.

Here is the key analysis from the report:

"The November PMI® registered 53.2 percent, an increase of 1.3 percentage points from the October reading of 51.9 percent. The New Orders Index registered 53 percent, an increase of 0.9 percentage point from the October reading of 52.1 percent. The Production Index registered 56 percent, 1.4 percentage points higher than the October reading of 54.6 percent. The Employment Index registered 52.3 percent, a decrease of 0.6 percentage point from the October reading of 52.9 percent. Inventories of raw materials registered 49 percent, an increase of 1.5 percentage points from the October reading of 47.5 percent. The Prices Index registered 54.5 percent in November, the same reading as in October, indicating higher raw materials prices for the ninth consecutive month. Comments from the panel cite increasing demand, some tightness in the labor market and plans to reduce inventory by the end of the year." [source]

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 a previous Briefing.com "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.

ISM Manufacturing

For a diffusion index, the latest reading of 53.2 is its third consecutive month of expansion after a month of contraction in August. 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 1.3 point change from last month? There are 827 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.