ISM Manufacturing Index Barely Breaks Even - PMI 50.7% for April 2013

The April 2013 ISM Manufacturing Survey shows PMI slid by -0.6 percentage points to 50.7%.  This is expansion but much slower.   Expansion has occurred for the 5th month in a row., although this is the lowest PMI of 2013.  Overall the report implies a stagnant manufacturing sector, ho hum, and not much to write home about.



This month's ISM report comments from manufacturing survey responders were diverse.  Some said business is flat, computers noted the lack of defense spending and one mentioned the insecure situation with North Korea affecting their South Korean business.

New Orders did pick up slightly, a 0.9 percentage point increase to 52.3%.  That's better at least than a decline in terms of future growth, although fairly flat.  New Orders inflection point, where contraction turns into expansion for the long term, isn't exactly 50%, it is 52.3% for new orders, which implies manufacturing new orders are really flat lined.

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 manufactured March durable goods new orders growth was -5.7%, where factory orders, or all of manufacturing data, will be out May 3rd.  The ISM claims the Census and their survey are consistent with each other.  To wit, 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 April 2013
Index April 2013 March 2013 % Change. Direction Rate of Change Trend Months
PMI™ 50.7 51.3 -0.6 Growing Slower 5
New Orders 52.3 51.4 +0.9 Growing Faster 4
Production 53.5 52.2 +1.3 Growing Faster 8
Employment 50.2 54.2 -4.0 Growing Slower 43
Supplier Deliveries 50.9 49.4 +1.5 Slowing From Faster 1
Inventories 46.5 49.5 -3.0 Contracting Faster 2
Customers' Inventories 44.5 47.5 -3.0 Too Low Faster 17
Prices 50.0 54.5 -4.5 Unchanged From Increasing 1
Backlog of Orders 53.0 51.0 +2.0 Growing Faster 3
Exports 54.0 56.0 -2.0 Growing Slower 5
Imports 55.0 54.0 +1.0 Growing Faster 3
OVERALL ECONOMY Growing Slower 47
Manufacturing Sector Growing Slower 5


Production, which is the current we're makin' stuff now meter, increased 1.3 percentage points from last month to 53.5%, which confirms business picked up in March.  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 51.2% 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.


ism vs. fed industrial production


The manufacturing ISM employment index slid -4.0 percentage points to 50.2%, but is still in expansion for the 43rd month in a row.   The neutral point for hiring vs. firing is 50.1%.   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 6 million jobs over the graphed time period.




Inventories contracted by -3.0 percentage points to 46.5%.  This is the worse news of the report.  As the economy is stagnant, businesses did not realize the growth they expected and are now clearly reducing inventories in response.  This negatively impacts GDP.   In December 2009 inventories came in at 41.9% for comparison's sake.   The ISM claims inventories are correlated to manufacturing inputs, that are part of GDP.  Changes in nonfarm inventories, of which manufacturing is only a part, only added 0.25 percentage points to Q1 2013's 2.5% GDP.

An Inventories Index greater than 42.8 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 1.5 percentage points to 50.9% and hit the 50 inflection point to slower supplies deliveries.



Order backlogs increased 2.0 percentage points to 53.0%.   This means backlogs of orders increased faster than last month.  More order backlogs would imply production and thus hiring would be stepped up.



Imports increased 1.0 percent points to 55.0% and and are in expansion.  Imports are materials from other countries manufacturers use to make their products.



New orders destined for export, or for customers outside of the United States,declined -2.0 percentage point to 51.5% and while still in expansion, are slower.



Prices are now flat as the index shows, a -4.5 percentage point decline from last month to the 50 no change inflection point.  Prices are what manufacturers pay to make their products.  In April 2009 the price subindex was 32%.



Customer's inventories declined,-3.0 percentage points to 44.5%.  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 reported contraction last month as well.

Of the 18 manufacturing industries, 14 are reporting growth in April in the following order: Furniture & Related Products; Printing & Related Support Activities; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Fabricated Metal Products; Paper Products; Machinery; Nonmetallic Mineral Products; Primary Metals; Miscellaneous Manufacturing; Petroleum & Coal Products; Plastics & Rubber Products; Transportation Equipment; and Computer & Electronic Products. The three industries reporting contraction in April are: Wood Products; Food, Beverage & Tobacco Products; and Chemical Products.

The ISM has a correlation formula to annualized real GDP, but they are now noting the past correlation.  Notice also that the PMI went to equal weighting in 2008.  April's data, gives a 2.7% 2013 annual real GDP correlation, which is a decline from previous estimates.  The below graph plots real GDP, left scale, against PMI, right scale, GDP up to Q1 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.



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.

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