ISM Manufacturing Index: Continued Growth in September

Today the Institute for Supply Management published its monthly Manufacturing Report for September. The latest headline Purchasing Managers Index (PMI) was 60.8 percent, an increase of 2.0 percent from 58.8 the previous month. Today's headline number was above the Investing.com forecast of 58.0 percent.

Here is the key analysis from the report:

"The September PMI® registered 60.8 percent, an increase of 2 percentage points from the August reading of 58.8 percent. The New Orders Index registered 64.6 percent, an increase of 4.3 percentage points from the August reading of 60.3 percent. The Production Index registered 62.2 percent, a 1.2 percentage point increase compared to the August reading of 61 percent. The Employment Index registered 60.3 percent, an increase of 0.4 percentage point from the August reading of 59.9 percent. The Supplier Deliveries Index registered 64.4 percent, a 7.3 percentage point increase from the August reading of 57.1 percent. The Inventories Index registered 52.5 percent, a decrease of 3 percentage points from the August reading of 55.5 percent. The Prices Index registered 71.5 percent in September, a 9.5 percentage point increase from the August level of 62, indicating higher raw materials prices for the 19th consecutive month. Comments from the panel reflect expanding business conditions, with new orders, production, employment, order backlogs and export orders all growing in September; as well as, supplier deliveries slowing (improving) and inventories growing at a slower rate during the period. The Customers’ Inventories Index remains at low levels." [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 60.8 is its thirteenth 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 2.0 point change from last month? There are 837 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.