The December ISM Manufacturing Survey is yet another awful month. Manufacturing is in a second month of contraction and this time slightly deeper than November. PMI was 48.2%, -0.4 percentage points lower than the previous month. New orders is still in contraction and employment plunged and went into contraction. Only six sectors showed any growth according to the survey. A contracting manufacturing sector two months in a row is not a good sign and this survey is highly correlated to other economic metrics.
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. This month the comments were horrific. While some say low gas prices are hurting them, most talked about weak demand and cutting their inventories.
New orders increased by 0.3 percentage points to 49.2%. This is in contraction for the 2nd month, but slower than last month.
The Census reported November durable goods new orders had no change, where factory orders, or all of manufacturing data, will be out later this week. Note the Census one month behind 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 December 2015
|Rate of Change
|Backlog of Orders
Production is the current, we're makin' stuff now meter and is still in contraction although increased slightly, 0.6 percentage points, from last month. 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 plunged by -3.2 percentage points to 48.1% and into contraction. The neutral point for hiring vs. firing is 50.6%, but at this point we'll take any growth. 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 has been contracting for the 6th month in a row with and now slightly slower in acceleration. This is about as bad as last month and comments from manufacturer's specifically mentioning cutting inventories indicates they believe they will have continued weak demand. Changes in inventories contributes to GDP. Inventories gives an estimate of how much raw materials manufacturers have on hand and the contraction implies manufacturers expect a slow down to continue. 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.
The contraction in raw materials inventories is not where one would think, instead petroleum inventories increased. From the report:
The five industries reporting higher inventories in December are: Petroleum & Coal Products; Furniture & Related Products; Plastics & Rubber Products; Computer & Electronic Products; and Chemical Products. The eight industries reporting lower inventories in December — listed in order — are: Primary Metals; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Machinery; Fabricated Metal Products; Miscellaneous Manufacturing; Paper Products; and Transportation Equipment.
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 by -0.3 percentage points to 50.3% which is slightly positive. 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 decreased by -2.0 percentage points to 41.0%. Order backlogs have been in contraction for the last seven months. Less order backlogs would imply there is no need to ramp up production to catch up, so this really is not a good sign.
Imports decreased by -3.5 percentage points to 45.5%. Imports are in contraction and faster than last month. 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, yet because manufacturers offshore outsourced so much, this also isn't a good sign and also implies weak global demand potentially.
New orders destined for export, or for customers outside of the United States popped up by 3.5 percentage points to 51.0% and into growth from contraction. Manufacturing exports can also imply pick up and slow down in global demand.
Prices decreased by -2.0 percentage points to 33.5%, which is decreasing and faster. Declining prices has been going on for 14 months now. The ISM gives an index correlation to BEA price increases of 52.1%.
Customer's inventories increased by 1.0 percentage points to 51.5%. 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. What is most disturbing is how many sectors are now shrinking.
Of the 18 manufacturing industries, six are reporting growth in December in the following order: Printing & Related Support Activities; Textile Mills; Paper Products; Miscellaneous Manufacturing; Chemical Products; and Food, Beverage & Tobacco Products. The 10 industries reporting contraction in December — listed in order — are: Apparel, Leather & Allied Products; Plastics & Rubber Products; Machinery; Primary Metals; Fabricated Metal Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Computer & Electronic Products; Wood Products; and Nonmetallic Mineral Products.
The ISM has a correlation formula to annualized real GDP. December alone gives a 1.6% annual real GDP correlation, yet for the year, indicates a 2.6% increase. The below graph plots real GDP, left scale, against PMI, right scale, real GDP up to Q3 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. Yet the estimate against itself is telling that a slowdown did occur at the end of the year.
The ISM manufacturing index is important due to the economic multiplier effect. People should really take note of this report and it appears Wall Street did from the slides and declines. U.S. manufacturing is about an eighth of the economy yet 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.