ISM Manufacturing and Non-Manufacturing
Business Activity Indexes

By Doug Short
July 5, 2012

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Earlier today the Institute for Supply Management published its June Non-Manufacturing ISM report on business. The more closely followed Manufacturing ISM report was published on Monday.

We have not posted routine updates on these reports for various reasons, but they are essentially captured in's Big Picture comment on the latter.

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 first chart below shows the Manufacturing series, which stretches back to 1948. We've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.



For a diffusion index, the June reading of 49.7 is slightly contractionary. How does that compare to the months before the start of recessions? Here are the eleven data points for the months before recessions arranged in numeric order with the latest data pointed included (highlighted in red).

42.1, 44.8, 45.7, 47.2, 47.8, 48.5, 49.2, 49.7, 50.5, 50.7, 53.2, 66.2

Seven were lower than the June data, and four were higher (the recessions that began in 1969, 1973, 1981 and 2007). The two extremes are rather interesting: At the high end is the month before the recession triggered 1973 Oil Embargo. The economy was clearly blindsided. At the low end was the recession following the bust.

The non-manufacturing series only dates back to July 1997, so we don't have a comparable historical perspective on the correlation of this indicator with recessions. Suffice to say that the June number for the Non-manufacturing Business Activity Index shows mild expansion and is fractionally above the level just before the start of the recession. From its peak of 67.7 in January 2004, indicator had been trending downward for nearly four years prior to onset of the last recession. The recent pattern has been a downtrend since its post-recession peak of 65.4 in February of 2011.



To reiterate the 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: We use 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.





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