The August ISM Manufacturing Survey shows more deceleration of the manufacturing sector. While a PMI of 51.1% is still growth, the decline in new orders is disconcerting. The composite PMI decreased by -1.6 percentage points and new orders decreased by -4.8 percentage points. Overall the report really shows a weakening manufacturing sector.
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. Strong and steady are mentioned to describe demand. Manufacturers also complain of a strong dollar hurting their products
New orders really slid by -4.8 percentage points to 51.7%. This represents weak growth in new orders.
The Census reported July durable goods new orders increased 2.0%, 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 August 2015|
|Index||August 2015||July 2015||% Change||Direction||Rate of Change||Trend Months|
|Supplier Deliveries||50.7||48.9||+1.8||Slowing||From Faster||1|
|Customers' Inventories||53.0||44.0||+9.0||Too High||From Too Low||1|
|Backlog of Orders||46.5||42.5||+4.0||Contracting||Slower||3|
Production, which is the current we're makin' stuff now meter, decreased 2.4 percentage point increase to 53.6%. This is still low-moderate growth. Production usually follows incoming orders in the next month.
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 also declined by -1.5 percentage points to 51.2%. This doesn't bode well for August manufacturing employment figures. The neutral point for hiring vs. firing is 50.6%. 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 showed a -1.0 percentage point monthly decrease to 48.5 and thus is contracting faster. Changes in inventories contributes to GDP . 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 increased 1.8 percentage points to 50.7%. 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 increased 4.0 percentage points to 46.5%. More order backlogs would imply a need to ramp up even more production and (hopefully) more new employees to reduce them. Order backlogs are still in contraction, although improving.
Imports decreased by -0.5 percentage points to 51.5%. 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, yet for manufacturers using cheap stuff to make other stuff, an increase is probably a good sign for the business activity.
New orders destined for export, or for customers outside of the United States continue to decline. Exports dropped -1.5 to 46.5% and this is deep into contraction. Exports could also indicate decline in global demand.
Prices decreased by -5.0 percentage points to 39.0%, which is decreasing and faster. The ISM gives an index correlation to BEA price increases of 52.1%.
Customer's inventories increased by 9.0 percentage points to 53.0%. 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. What is interesting here is the volatility, a large swing where now customer's inventories are too high.
Generally speaking manufacturers' comments were much more upbeat than the numbers implied. Most said business is good. . Here is the ISM industrial sector ordered list of growth and contraction.
Of the 18 manufacturing industries, 10 are reporting growth in August in the following order: Textile Mills; Furniture & Related Products; Paper Products; Nonmetallic Mineral Products; Chemical Products; Food, Beverage & Tobacco Products; Miscellaneous Manufacturing; Fabricated Metal Products; Plastics & Rubber Products; and Machinery. The six industries reporting contraction in August — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Electrical Equipment, Appliances & Components; Petroleum & Coal Products; Computer & Electronic Products; and Transportation Equipment.
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). August alone gives a 2.5% annual real GDP correlation, yet for the year, indicates a2.9% increase. The below graph plots real GDP, left scale, against PMI, right scale, real GDP up to Q2 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.