ISM Manufacturing Index: Slowest Growth Since May 2013

April 1, 2015

by Doug Short

Today the Institute for Supply Management published its monthly Manufacturing Report for March. The latest headline PMI was 51.5 percent, a decline from the previous month's 52.9 percent and below the Investing.com forecast of 52.5. This was the lowest PMI since May 2013.

Here is the key analysis from the report:

"The March PMI® registered 51.5 percent, a decrease of 1.4 percentage points from February’s reading of 52.9 percent. The New Orders Index registered 51.8 percent, a decrease of 0.7 percentage point from the reading of 52.5 percent in February. The Production Index registered 53.8 percent, 0.1 percentage point above the February reading of 53.7 percent. The Employment Index registered 50 percent, 1.4 percentage points below the February reading of 51.4 percent, reflecting unchanged employment levels from February. Inventories of raw materials registered 51.5 percent, a decrease of 1 percentage point from the February reading of 52.5 percent. The Prices Index registered 39 percent, 4 percentage points above the February reading of 35 percent, indicating lower raw materials prices for the fifth consecutive month. Comments from the panel refer to continuing challenges from the West Coast port issue, lower oil prices having both positive and negative impacts depending upon the industry, residual effects of the harsh winter, higher costs of healthcare premiums, and challenges associated with the stronger dollar on international business."

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.

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For a diffusion index, the latest reading of 51.5 indicates 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 1.4 point change from last month? There are 807 monthly data points in this series. The absolute average month-to-month point change is 2.0 points. The month-over-month change in today's headline PMI number is below the average MoM change.

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

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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.

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