ISM Manufacturing Index: Down in April, Expanding Slower

Today the Institute for Supply Management published its monthly Manufacturing Report for April. The latest headline Purchasing Managers Index (PMI) was 54.8 percent, a decrease of 2.4 percent from 57.2 the previous month. Today's headline number was below the Investing.com forecast of 56.5 percent.

Here is the key analysis from the report:

"The April PMI® registered 54.8 percent, a decrease of 2.4 percentage points from the March reading of 57.2 percent. The New Orders Index registered 57.5 percent, a decrease of 7 percentage points from the March reading of 64.5 percent. The Production Index registered 58.6 percent, 1 percentage point higher than the March reading of 57.6 percent. The Employment Index registered 52 percent, a decrease of 6.9 percentage points from the March reading of 58.9 percent. Inventories of raw materials registered 51 percent, an increase of 2 percentage points from the March reading of 49 percent. The Prices Index registered 68.5 percent in April, a decrease of 2 percentage points from the March reading of 70.5 percent, indicating higher raw materials prices for the 14th consecutive month, but at a slower rate of increase in April compared with March. Comments from the panel generally reflect stable to growing business conditions; with new orders, production, employment and inventories of raw materials all growing in April over March." [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 54.8 is its eighth consecutive month of 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 2.4 point change from last month? There are 832 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.