The April ISM Manufacturing Survey PMI had no change from March and is still a barely breathing growth of 51.5%. Manufacturing employment went into contraction as did inventories. Exports improved as did new orders and production. The worse news of the ISM manufacturing report is employment. Manufacturing jobs have just been hammered and slaughtered so to see indicators of yet more layoffs is really bad news and implies manufacturers don't see March and April as just a little bump in the road. This is also the weakest growth in two years.
The ISM Manufacturing survey is a direct survey of manufacturers. Generally speaking indexes above 50% indicate growth and below indicate contraction. Every month ISM publishes survey responders' comments, which are part of their survey. In spite of the slow and sluggish growth manufacturer's comments are still positive. Cheap energy was a positive and multiple sectors commented on the West cost port strike, which was long over in April. Others mentioned slow growth and flat demand.
New orders did increase 1.7 percentage points to 53.5%, which is still fairly weak growth.
The Census reported March durable goods new orders increased 4.0%, where factory orders, or all of manufacturing data, will be out later this month. Note the Census 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 March 2015|
|Index||March 2015||April 2015||% Change||Direction||Rate of Change||Trend Months|
|Customers' Inventories||45.5||44.0||-1.5||Too Low||Faster||5|
|Backlog of Orders||49.5||49.5||0.0||Contracting||Same||2|
Production, which is the current we're makin' stuff now meter, increased +2.2 percentage point increase to 56.0%. Production usually follows incoming orders in the next month so this is surprising but a positive sign.
ISM's manufacturing production index loosely correlates to the Federal Reserve's industrial production, but not at 50% as the inflection point, instead 51.1% 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 is now technically below at the dreaded inflection point and increased even further than last month. This index really needs to be in the 60's to have real job creation. The neutral point for hiring vs. firing is 50.6%. Generally speaking 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.
The inventories index just went into contraction with a -2.0 percentage point monthly decrease. Inventories gives an estimate of how much raw materials manufacturers have on hand. Quoted below is the relationship between BEA and ISM inventories, not the 50% inflection point one would assume.
An Inventories Index greater than 42.9 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories in chained 2000 dollars.
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 decreased -0.4 percentage points to 50.1%. 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.
Order backlogs have been in contraction for two months now and had no change from last month. More order backlogs would imply a need to ramp up even more production and (hopefully) more new employees to reduce them. This contraction is seemingly with a broad group of industries again: Apparel, Leather & Allied Products; Nonmetallic Mineral Products; Petroleum & Coal Products; Miscellaneous Manufacturing; Computer & Electronic Products; Food, Beverage & Tobacco Products; and Chemical Products.
Imports reversed last month's change and increased by +1.5 percentage points to 54.0%. 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. More imports is really a negative sign for domestic economic growth.
New orders destined for export, or for customers outside of the United States popped up by +4.0 percentage point to 51.5% and moved into expansion. This is the best news of the report and could also show an improvement in global demand.
Prices are still decreasing but increased by +1.5 percentage points to 40.5%. The ISM gives an index correlation to BEA price increases of 52.1%.
Customer's inventories decreased by -1.5 percentage points to 44.0%. Below 50 means customer's inventories are considered by manufacturers to be too low and an increasing change can imply customers don't think they can sell as much. 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. Notice there are only three industries in contraction.
Of the 18 manufacturing industries, 15 are reporting growth in April in the following order: Nonmetallic Mineral Products; Plastics & Rubber Products; Wood Products; Printing & Related Support Activities; Furniture & Related Products; Fabricated Metal Products; Food, Beverage & Tobacco Products; Paper Products; Miscellaneous Manufacturing; Machinery; Transportation Equipment; Textile Mills; Electrical Equipment, Appliances & Components; Chemical Products; and Primary Metals. The two industries reporting contraction in April are: Apparel, Leather & Allied Products; and Computer & Electronic Products..
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 43.1% to indicate economic growth (right). April alone gives a 2.6% annual real GDP correlation, yet for the year, indicates a 2.9% increase. The below graph plots real GDP, left scale, against PMI, right scale, real GDP up to Q1 2015. 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.
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 of equally weighted and seasonally adjusted New Orders, Production, Employment, Supplier Deliveries and Inventories.
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 as noted above. Here are past manufacturing ISM overviews, unrevised. The ISM has much more data, tables, graphs and analysis on their website. 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.