ISM Manufacturing Index: Growth Beats Forecast

August 1, 2014

by Doug Short

Today the Institute for Supply Management published its July Manufacturing Report. The latest headline PMI at 57.1 came in well above last month's 55.3 percent and above the Investing.com forecast of 56.0.

Here is the key analysis from the report:

"The July PMIĀ® registered 57.1 percent, an increase of 1.8 percentage points from June's reading of 55.3 percent, indicating expansion in manufacturing for the 14th consecutive month. The New Orders Index registered 63.4 percent, an increase of 4.5 percentage points from the 58.9 percent reading in June, indicating growth in new orders for the 14th consecutive month. The Production Index registered 61.2 percent, 1.2 percentage points above the June reading of 60 percent. Employment grew for the 13th consecutive month, registering 58.2 percent, an increase of 5.4 percentage points over the June reading of 52.8 percent. Inventories of raw materials registered 48.5 percent, a decrease of 4.5 percentage points from the June reading of 53 percent, contracting after five months of consecutive growth. Comments from the panel are generally positive, while some indicate concern over global geopolitical situations."

Here is the table of PMI components.

I'm reluctant to put too much focus on this index for various reasons, but they 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. I've highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.

Click to View
Click for a larger image

For a diffusion index, the latest reading of 57.1 indicates expansion. What sort of correlation does that have with the months before the start of recessions? Here are the eleven data points for the months before recessions arranged in numeric order. The latest data pointed (highlighted in red) is higher than the level prior to ten of the eleven.

42.1, 44.8, 45.7, 47.2, 47.8, 48.5, 49.2, 50.5, 50.7, 53.2, 57.1, 66.2

How revealing is today's 1.8 point change from last month? There are 798 monthly data points in this series. The absolute average month-to-month point change is 2.0 points. So month-over-month change in today's headline PMI number is close to the average MoM change.

Here is a closer look at the series beginning at the turn of the century.

Click to View
Click for a larger image

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 : I 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.

Website by the Boston Web Company