ISM Manufacturing Index: Activity Expanded in June

Today the Institute for Supply Management published its monthly Manufacturing Report for June. The latest headline Purchasing Managers Index (PMI) was 57.8 percent, an increase of 2.9 percent from 54.9 the previous month. Today's headline number was above the Investing.com forecast of 55.2 percent.

Here is the key analysis from the report:

"The June PMI® registered 57.8 percent, an increase of 2.9 percentage points from the May reading of 54.9 percent. The New Orders Index registered 63.5 percent, an increase of 4 percentage points from the May reading of 59.5 percent. The Production Index registered 62.4 percent, a 5.3 percentage point increase compared to the May reading of 57.1 percent. The Employment Index registered 57.2 percent, an increase of 3.7 percentage points from the May reading of 53.5 percent. The Supplier Deliveries index registered 57 percent, a 3.9 percentage point increase from the May reading of 53.1 percent. The Inventories Index registered 49 percent, a decrease of 2.5 percentage points from the May reading of 51.5 percent. The Prices Index registered 55 percent in June, a decrease of 5.5 percentage points from the May reading of 60.5 percent, indicating higher raw materials’ prices for the 16th consecutive month, but at a slower rate of increase in June compared with May. Comments from the panel generally reflect expanding business conditions; with new orders, production, employment, backlog and exports all growing in June compared to May and with supplier deliveries and inventories struggling to keep up with the production pace." [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 57.8 is its tenth 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 2.9 point change from last month? There are 834 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.