The October ISM Manufacturing Survey shows PMI increased 0.2 percentage points to 56.4% to another year high. Seems the survey results held in spite of the economic sabotage government shutdown although production figures declined by -1.8 percentage points. Increases in Inventories and slowing Supplier Deliveries is the reason PMI increased.
The ISM manufacturing index is important due to manufacturing's 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. Comments were varied with textile products proclaiming business is booming to some manufacturers reporting the government shutdown affected them to some mentioning big box stores were giving discounts on their products, thus boosting their sales.
New orders increased -0.1 percentage points to 60.6%. This is strong growth, the index is in the 60's, and staying there. Below is the correlation with the Census Bureau.
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.
The Census reported September durable goods new orders increased by 3.7%, where factory orders, or all of manufacturing data, will be out later this month, but note the one month lag from the ISM survey. Additionally, due to the shutdown, we only have new orders for all manufacturing up to July due to the shutdown, August and September will be released on November 4th. The ISM claims the Census and their survey are consistent with each other. 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.
Below is the ISM table data, reprinted, for a quick view.
|ISM Manufacturing September 2013|
|Index||September 2013||October 2013||% Change.||Direction||Rate of Change||Trend Months|
|Customers' Inventories||43.0||47.0||+4.0||Too Low||Slower||23|
|Backlog of Orders||49.5||51.5||+2.0||Growing||From Contracting||1|
Production, which is the current we're makin' stuff now meter,dropped by -1.8 percentage points from last month to 60.8%, but numbers in the 60's still indicates strong growth in production. Production usually follows incoming orders in the next month, although a production index in the 60's is strong growth. 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 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 dropped by -2.2 percentage points to 53.2%, which is growth, but simply way too slow considering the high production and new order indexes. The neutral point for hiring vs. firing is 50.1%. Employment lags new orders and production, yet generally speaking it seems manufacturing employment just never gets off the ground and one must wonder if offshore outsourcing is impacting this index. 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 5.8 million jobs over the graphed time period.
October saw inventories gain 2.5 percentage points to 52.5%, the second month in a row and is one of the reasons PMI showed a positive gain. As the economy is stagnant, businesses adjust inventories in response, which in turn impacts GDP. In December 2009 inventories came in at 41.9% for comparison's sake. This is actually good news for it implies manufacturer's believe demand maybe picking up for their products.
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 2.1 percentage points to 54.7%, which means slower speed. 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 but there ya have it.
Order backlogs gained 2.0 percentage points to 51.5% which is growth. Backlogs of orders contraction generally is not good news. Less order backlogs would imply less production and less new employees to reduce backlogs, yet this also is a huge improvement over the last couple of months.
Imports increased 0.5 percent points to 55.5% and and are in expansion for the 9th 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 skyrocketed up by 5.0 percentage point to 57.0% and is in expansion for the 11th month in a row. This is the highest level in exports since April 2012. Seeing strong growth in exports from U.S. manufacturers, is great news from a trade perspective as well as implications on global economic demand picking up.
Prices declined by -1.0 percentage points to 55.5% which shows raw materials prices increased, but at a slower rate. Prices are yo-yo, up and down but this is the 3rd month in a row for price increases in materials used by manufacturers.
Customer's inventories increased by 4.0 percentage points to 47.0%. 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.
Here is the ISM industrial sector ordered list of growth and contraction. Chemical products always seems to be in contraction and looks like they could use a break of some kind. The United States doesn't need to lose another manufacturing sector of this importance.
Of the 18 manufacturing industries, 14 are reporting growth in October in the following order: Textile Mills; Food, Beverage & Tobacco Products; Furniture & Related Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Transportation Equipment; Petroleum & Coal Products; Wood Products; Plastics & Rubber Products; Nonmetallic Mineral Products; Machinery; Paper Products; and Fabricated Metal Products. The four industries reporting contraction in October are: Apparel, Leather & Allied Products; Primary Metals; Chemical Products; and Miscellaneous Manufacturing
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. Octoberr's data, gives a 4.4% 2013 annual real GDP correlation and if PMI for the year is annualized, the implication is 3.5% annual real GDP growth. The below graph plots real GDP, left scale, against PMI, right scale, GDP up to Q2 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. Of all of the ISM's correlations, this is the one which consistently is way off, yet this is a high in terms of economic growth implications.
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 is last month's manufacturing ISM overview, 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.