The October ISM Manufacturing Survey recovered from last month's plunge. PMI rose by 2.4 percentage points to 59%. New orders caused the overall gain and by themselves jumped up 5.8 percentage points to the 60's level. Production is at highs not seen in a decade. This is a great report, even with declines in petroleum and coal.
This is a direct survey of manufacturers and every month ISM publishes survey responders' comments. Most of the sectors implied strong growth but this one from the Food, Beverage & Tobacco Products industry below shows how lower gas prices results in more purchases elsewhere:
Holiday orders are exceeding seasonal forecasts. Customers are demanding additional quantities above prior orders. Fuel costs and other positive signals appear to be creating demand above normal.
New orders are now in the solid 60's. The 5.8 percentage point shoot up from last month gives a level of 65.8%.
The Census reported September durable goods new orders declined by -1.3%, 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 October 2014|
|Index||October 2014||September 2014||% Change.||Direction||Rate of Change||Trend Months|
|Customers' Inventories||48.0||44.5||+3.5||Too Low||Slower||35|
|Backlog of Orders||53.0||47.0||+6.0||Growing||From Contracting||1|
Production, which is the current we're makin' stuff now meter, is at a 10 year record high. . Production usually follows incoming orders in the next month so we should expect this level to continue.
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 is now 55.5% and increased 0.9 percentage points from 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 50.1%. 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. This is just monthly change.
The inventories index, which gives an estimate of how much raw materials manufacturers have on hand, grew a percentage point to 52.5%. Below is the relationship between BEA and ISM inventories
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 4.0 percentage points to 56.2%, which means a 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.
Order backlogs increased 6.0 percentage points to 53.0% and moved from contraction to expansion. More order backlogs would imply even more production and (hopefully) more new employees to reduce backlogs.
Imports increased by 1.5 percentage points to 54.5%. 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.
New orders destined for export, or for customers outside of the United States declined by -2.0 percentage point to 51.5% and has been in expansion for 23 months. While the decline isn't very good news, at least manufacturer's exports are still growing, abet 51.5% is near the contraction point.
Price increases really slowed as the subindex dropped by -6.0 percentage points to 53.5%. The ISM gives an index correlation to BEA price increases of 49.7%.
Customer's inventories increased by 3.5 percentage points to 48.0%. 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. This sub-index is kind of useless as it always reports customer's inventories are too low, although by how much can indicate inventory contractions and expansions.
Here is the ISM industrial sector ordered list of growth and contraction. The collapse in gas prices shows the weaker demand, so Petroleum and Coal not showing growth this month should be no surprise.
Of the 18 manufacturing industries, 16 are reporting growth in October in the following order: Plastics & Rubber Products; Textile Mills; Fabricated Metal Products; Miscellaneous Manufacturing; Primary Metals; Electrical Equipment, Appliances & Components; Nonmetallic Mineral Products; Food, Beverage & Tobacco Products; Chemical Products; Apparel, Leather & Allied Products; Printing & Related Support Activities; Transportation Equipment; Furniture & Related Products; Paper Products; Machinery; and Computer & Electronic Products. The only industry reporting contraction in October is Petroleum & Coal 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 42.2% to indicate economic growth (right). Notice also that the PMI went to equal weighting in 2008. October alone gives a 5.2% 2014 annual real GDP correlation. The below graph plots real GDP, left scale, against PMI, right scale, real GDP up to Q3 2014. 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.
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.