The December ISM Manufacturing Survey shows PMI decreased -0.3 percentage points to 57.0%. This is still strong growth, the 2nd highest in 2013, although manufacturing inventories contracted. Overall manufacturing looks stable with 13 of the 18 industries reporting growth. The employment index is at a high not seen since June 2011.
The ISM manufacturing index is important due to the economic multiplier effect. While manufacturing is about an eighth of the economy, it is of scale and spawns all sorts of additional economic growth surrounding the sector. PMI is a composite index using five of the sub-indexes, new orders, production, employment, supplier deliveries and inventories, equally weighted.
This is a direct survey of manufacturers and every month ISM publishes survey responders' comments. Overall survey respondent comments were positive, with many implying demand has picked up. Transportation said the continued government spending cuts have impacted negatively their production. Fabricated Metal Products said this was their largest backlog of orders ever, a positive sign. Even furniture said they were busy, busy, busy.
New orders increased 0.6 percentage points to 64.2%. This is really strong growth, the index is in the 60's, and increasing. Generally speaking, ISM sub-indexes in the 60's and staying there are truly positive signs for the manufacturing sector.
The Census reported November durable goods new orders increased by 3.5%, where factory orders, or all of manufacturing data, will be out later this month, but note the one month lag from the ISM survey. The ISM claims the Census and their survey are consistent with each other and they are right. Below is a graph of manufacturing new orders percent change from one year ago (blue, scale on right), against ISM's manufacturing new orders index (maroon, scale on left) to the last release data available for the Census manufacturing statistics. Here we do see a consistent pattern between the two and this is what the ISM says is the growth mark:
A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders.
Below is the ISM table data, reprinted, for a quick view.
|ISM Manufacturing December 2013|
|Index||November 2013||December 2013||% Change.||Direction||Rate of Change||Trend Months|
|Customers' Inventories||45.0||47.5||+2.5||Too Low||Slower||25|
|Backlog of Orders||54.0||51.5||-2.5||Growing||Slower||3|
Production, which is the current we're makin' stuff now meter, decreased -0.6 percentage points from last month and again numbers in the 60's indicates strong growth in production. Production usually follows incoming orders in the next month. The last time the production index was consistently in the 60's was March 2011.
ISM's manufacturing production index loosely correlates to the Federal Reserve's industrial production, but not at 50% as the inflection point, instead 51.2% to indicate growth. Below is a quarterly graph of the ISM manufacturing production index (left, maroon), centered around the inflection point, quarterly average, against the Fed's manufacturing industrial production index's quarterly change (scale right, blue). We can see there is a matching pattern to the two different reports on manufacturing production.
The manufacturing ISM employment index increased by 0.4 percentage points to 56.9%, which is growth, but one wants to see this figure in the 60's to show some real job creation. The neutral point for hiring vs. firing is 50.1%. While the employment index is at a two and a half year high, the reality is manufacturing jobs have just been hammered going all the way back to the 1990's. Below are the BLS manufacturing non-farm payrolls (jobs) for the past decade on the left (maroon), graphed against the ISM manufacturing employment index on the right (blue). The BLS manufacturing payrolls is the monthly percentage change and the ISM manufacturing employment index is centered around it's inflection point of contraction and employment growth. This is just monthly change, manufacturing has lost approximately six million jobs over the graphed time period.
The inventories index declined by -3.5 percentage points to 47.0% and moved into contraction. As the economy is stagnant, businesses adjust inventories in response, which in turn impacts GDP and for Q4, probably negatively although most inventory statistics are not available yet. In December 2009 inventories came in at 41.9% for comparison's sake. According to the ISM:
An Inventories Index greater than 42.7 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories.
Supplier deliveries are how fast manufacturers can get their supplies. A value higher than 50 indicates slower delivery times, a value below 50 means the supply chain is speeding up. The index increased by 1.5 percentage points to 54.7%, which means a slower speed and slower than the previous month. You may wonder why slow deliveries would boost up PMI and indicate stronger growth in manufacturing. The reason is slower vendor performance means there is probably higher demand for that supply and thus indicates increasing activity. Seems really round about way to indicate economic growth, but there ya have it.
Order backlogs dropped -2.5 percentage points to 52.5% which is still growth but slower. Backlogs of orders increasing is generally good news. Less order backlogs would imply less production and less new employees to reduce backlogs, and we need about anything to get manufacturing hiring increasing,so the overall decline isn't great.
Imports had no change from last month's 55.0% index reading. Imports are in expansion for the 13th month in a row. Imports are materials from other countries manufacturers use to make their products and high levels isn't too great for economies of scale in the U.S. We want to see U.S. manufacturers use other U.S. manufactured materials instead of imports as much as possible.
New orders destined for export, or for customers outside of the United States plunged by -4.5 percentage point to 55.0% and has been in expansion for 13 months. The plunge isn't very good news. While ISM does not mention a correlation to trade figures, a slowing of exports does not bode well for GDP and the trade deficit.
Prices increased a percentage point to 53.5% which shows raw materials prices increased again, and at a faster rate. Prices are yo-yo, up and down, but this is the 5th month in a row for price increases in materials used by manufacturers. The ISM gives an index correlation to BEA price increases of 49.7%.
Customer's inventories increased by 2.5 percentage points to 47.5%. Below 50 means customer's inventories are considered by manufacturers to be too low. Customer inventories, not to be confused with manufacturer's inventories, are how much customers have on hand, and rates the level of inventories the organization's customers have. This sub-index is kind of useless as it always reports customer's inventories are too low. What is more interesting is the industries where it is claimed customer's inventories are too high. Those are: Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Chemical Products; Food, Beverage & Tobacco Products; and Fabricated Metal Products.
Here is the ISM industrial sector ordered list of growth and contraction. Chemical products is back in contraction and one must wonder if they are being hammered by offshore production.
Of the 18 manufacturing industries, 13 are reporting growth in December in the following order: Furniture & Related Products; Plastics & Rubber Products; Textile Mills; Apparel, Leather & Allied Products; Computer & Electronic Products; Paper Products; Transportation Equipment; Primary Metals; Fabricated Metal Products; Wood Products; Printing & Related Support Activities; Food, Beverage & Tobacco Products; and Miscellaneous Manufacturing. The four industries reporting contraction in December are: Nonmetallic Mineral Products; Machinery; Chemical Products; and Electrical Equipment, Appliances & Components.
The ISM has a correlation formula to annualized real GDP, but they are now noting the past correlation, but note, PMI only has to be above 42.2% to indicate economic growth (right). Notice also that the PMI went to equal weighting in 2008. December alone gives a 4.6% 2013 annual real GDP correlation. If PMI for the year is annualized, the implication is 3.7% annual real GDP growth. The below graph plots real GDP, left scale, against PMI, right scale, GDP up to Q3 2013. One needs to look at the pattern of the two lines to get anything out of this by quarters graph. If they match, GDP goes up, PMI goes up, would imply some correlation. While ISM says there is a correlation, it might be in the long past, after multiple revisions to GDP has come to fruition.
The ISM neutral point is 50, generally. Above is growth, below is contraction, There is some some variance in the individual indexes and their actual inflection points. For example, A manufacturing PMI above 42, over time, also indicates growth, even while manufacturing is in the dumpster. Here are past manufacturing ISM overviews, unrevised. The ISM has much more data, tables, graphs and analysis on their website. For more graphs like the above, see St. Louis Federal Reserve Fred database and graphing system. PMI™ stands for purchasing manager's index. On ISM correlations to other indexes, when in dollars they normalized to 2000 values. The above graphs do not do that, so our graphs are much more rough than what the ISM reports these indices track.
Note: The ISM is seasonally adjusting some of these indexes and not others due to the criteria for seasonal adjustment. Those indexes not seasonally adjusted are: Inventories, Customers' Inventories, Prices, Backlog of Orders, New Export Orders and Imports.