ISM Manufacturing Index: "Expanding Business Conditions" in October
Today the Institute for Supply Management published its monthly Manufacturing Report for October. The latest headline Purchasing Managers Index (PMI) was 58.7 percent, a decrease of 2.1 percent from 60.8 the previous month. Today's headline number was below the Investing.com forecast of 59.5 percent.
Here is the key analysis from the report:
"The report was issued today by Timothy R. Fiore, CPSM, C.P.M., Chair of the Institute for Supply Management® (ISM®) Manufacturing Business Survey Committee: "The October PMI® registered 58.7 percent, a decrease of 2.1 percentage points from the September reading of 60.8 percent. The New Orders Index registered 63.4 percent, a decrease of 1.2 percentage points from the September reading of 64.6 percent. The Production Index registered 61 percent, a 1.2 percentage point decrease compared to the September reading of 62.2 percent. The Employment Index registered 59.8 percent, a decrease of 0.5 percentage point from the September reading of 60.3 percent. The Supplier Deliveries Index registered 61.4 percent, a 3 percentage point decrease from the September reading of 64.4 percent. The Inventories Index registered 48 percent, a decrease of 4.5 percentage points from the September reading of 52.5 percent. The Prices Index registered 68.5 percent in October, a 3 percentage point decrease from the September level of 71.5, indicating higher raw materials prices for the 20th consecutive month. Comments from the panel reflect expanding business conditions, with new orders, production, employment, order backlogs and export orders all continuing to grow in October, supplier deliveries continuing to slow (improving) and inventories contracting during the period. Prices continue to remain under pressure. 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.
For a diffusion index, the latest reading of 58.7 is its fourteenth 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 2.1 point change from last month? There are 838 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.