Manufacturing ISM for January 2011 - 60.8%

The January 2011 ISM Manufacturing Survey is out and PMI came in at booming 60.8%. December 2010 manufacturing ISM was revised to 58.5% from 57% originally reported. This is a +2.3% jump in the factory index, or PMI, the overall manufacturing ISM index and it's highest level since May 2004. While this is the 18th month for expansion (anything above 50 is an expansion), there is finally some good news for workers, the employment index rose to 61.7%, also the highest since May 2004.



The ISM has a correlation formula to annualized GDP. They claim this month's PMI correlates to a 6.4% annualized GDP increase. Wouldn't that be nice! This is what the Institute of Supply Management survey respondents said about a weaker dollar. One respondent also said they were reluctant to hire. Last month they also commented a weaker dollar was helping their exports.

Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs.

New orders jumped 5.8 percentage points to 67.8%. That's pretty damn awesome!



Production, which is the current we're makin' stuff now meter, only increased 0.5 percentage points to 63.5%, but last month's 63% appears to be revised upward as does most of last month's reported percentages.



Below is the ISM table data, reprinted, for a quick view.





PMI 60.8 58.5 +2.3 Growing Faster 18
New Orders 67.8 62.0 +5.8 Growing Faster 19
Production 63.5 63.0 +0.5 Growing Faster 20
Employment 61.7 58.9 +2.8 Growing Faster 16
Supplier Deliveries 58.6 56.7 +1.9 Slowing Faster 20
Inventories 52.4 51.8 +0.6 Growing Faster 7
Customers' Inventories 45.5 40.0 +5.5 Too Low Slower 22
Prices 81.5 72.5 +9.0 Increasing Faster 19
Backlog of Orders 58.0 47.0 +11.0 Growing From Contracting 1
Exports 62.0 54.5 +7.5 Growing Faster 19
Imports 55.0 50.5 +4.5 Growing Faster 17
OVERALL ECONOMY Growing Faster 20
Manufacturing Sector Growing Faster 18


Now we come to employment. If manufacturing has expanded for the last 18 months, where are the damn jobs? According to the ISM, anything about 50.1 correlates to an increase in manufacturing employment as reported by the BLS. Really ISM? From the below graph we have the ISM manufacturing employment index above 50.1 consecutively since December 2009. Want to know how many manufacturing jobs have been gained in those 12 months? 136,000.

Dear ISM,

I believe your employment correlation is getting weaker. Is there an offshore outsourcing coefficient in your midst?


Robert Oak

Below is the ISM manufacturing employment graph so you can see the trend line. The good news is the backlog of orders blew up, 11 percentage points higher, for January, so assuredly they must add a few wage slaves at this point to catch up.



Inventories, in the below St. Louis FRED graph, increased 0.6 percentage points to expansion, 52.4%. The ISM says inventories above 42.7% indicate expansion, yet it's clear past inventory numbers were revised. Considering the massive negative blow out inventories had on Q4 GDP, I'd say this increase doesn't imply an acceleration of inventories, at least for manufacturing. (private inventories is much more than just manufacturing).



Exports & imports increased, exports up 7.5 percentage points, and imports 4.5. That's always good news when exports exceed imports, especially since the deceleration of imports was the reason we had reasonable Q4 GDP growth.



Prices had a blow out, with a 9.0 percentage increase to 81.5. Thank you oil commodities, although it appears goods for making cloth blew up as well.



The ISM neutral point is 50. Above is growth, below is contraction, although the ISM is this report is noting some variance in the individual indexes (see their report). For example, A PMI above 42, over time, also indicates growth.

In terms of which industries were doing really well, Petroleum and Coal topped many of the lists. In terms of which industry was most affected by increased prices, it was textiles, followed by plastics.

The ISM has much more data and tables, on their website.

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Krugman, how good is that PMI number?

Krugman ran PMI against annualized GDP and created a nice messy scatter plot and posted it. The ISM ain't lying on the correlation it seems.
Krugman's post on PMI.

Rutherford, Seeking Alpha article, RO additional comments

I just read this post commenting on the recent come alive data on the U.S. manufacturing sector.

Just a comment, he's right in his article (link again), the inputs to U.S. manufacturing w.r.t the ISM are imports, exports are finished goods, and is not correlated to what we think of as imports/exports from the U.S. trade imports/exports. (or necessarily, I have never seen any correlation for it at least, suffice it to say they are not the same thing).

Rutherford is also correct that the ISM percentage point monthly change is the rate of change and in terms of imports/exports, it is absolute levels which tell you the ratio per month.

Finally, in terms of GDP though, I beg to differ in a way. When one has a deceleration of imports, that change, or delta, does imply increased GDP due to, if I can call it this, a substitution effect...i.e. import less yet activity humming, implies domestic goods were used for that "economic hum". So, while not the "true strength" of the economy, in a way it implies some "true strength" due to the above.

This comment on GDP is separate from any comment in the manufacturing ISM and it's respective import/export indices.

So, sorry, got kind of sloppy on that import/export statement and glad there are others catching this stuff and discussing it in other articles.