ISM Manufacturing Index: Expansion in February, Sixth Consecutive Month

Today the Institute for Supply Management published its monthly Manufacturing Report for February. The latest headline Purchasing Managers Index (PMI) was 57.7 percent, an increase of 1.7 percent from 56.0 the previous month, and its highest since August of 2014. Today's headline number was above the Investing.com forecast of 56.0 percent.

Here is the key analysis from the report:

“The February PMI® registered 57.7 percent, an increase of 1.7 percentage points from the January reading of 56 percent. The New Orders Index registered 65.1 percent, an increase of 4.7 percentage points from the January reading of 60.4 percent. The Production Index registered 62.9 percent, 1.5 percentage points higher than the January reading of 61.4 percent. The Employment Index registered 54.2 percent, a decrease of 1.9 percentage points from the January reading of 56.1 percent. Inventories of raw materials registered 51.5 percent, an increase of 3 percentage points from the January reading of 48.5 percent. The Prices Index registered 68 percent in February, a decrease of 1 percentage point from the January reading of 69 percent, indicating higher raw materials prices for the 12th consecutive month. Comments from the panel largely indicate strong sales and demand, and reflect a positive view of business conditions with a watchful eye on commodities and the potential for inflation.” [source]

Here is the table of PMI components.

The ISM Manufacturing Index should be viewed with a bit of skepticism 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 57.7 is its sixth 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 1.7 point change from last month? There are 830 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.