The March ISM Manufacturing Survey shows manufacturing is barely breathing growth as a monthly -1.4 percentage point decline put PMI near the contraction edge. PMI is now 51.5% and if the index falls below 50%...that's contraction. The reason for the slide was supplier deliveries, which were more streamlined indicating less to ship and slower manufacturing hiring. New orders declined by none of the indexes which make up PMI are in contraction...yet. The worse news of the ISM manufacturing report is employment. Manufacturing jobs have just been hammered and slaughtered so to see any indication of no hiring is just a sad and all too familiar sight.
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. In spite of the slowing growth manufacturer's comments are exceedingly positive. Cheap gas was mentioned but only Computer & Electronics said business was slowing down. Textiles and machinery mentioned West cost port delivery congestion being an issue.
New orders really are sluggish now as the index dropped -0.7 percentage points to 51.8%.
The Census reported February durable goods new orders declined by -1.4%, 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 March 2015|
|Index||March 2015||February 2015||% Change||Direction||Rate of Change||Trend Months|
|Customers' Inventories||45.5||46.5||-1.0||Too Low||Faster||4|
|Backlog of Orders||49.5||51.5||-2.0||Contracting||From Growing||1|
Production, which is the current we're makin' stuff now meter, barely budged with a +0.1 percentage point increase to be at 53.8%. Production usually follows incoming orders in the next month so we should expect production growth to slow down 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 is now technically below at the dreaded inflection point as it decreased -1.4 percentage points from last month and stands at 50.0%. This index really needs to be in the 60's to have real job creation. The neutral point for hiring vs. firing is 50.6%. 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.
The inventories index is still growing but slower. Inventories gives an estimate of how much raw materials manufacturers have on hand. They declined -1.0 percentage points to 51.5%. 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 decreased by -3.8 percentage points to 50.5%, which is still slow, yet the rate of change is "less slow" than the previous month. 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. This month the fastest supplier deliveries were Petroleum & Coal Products. This should be no surprise since demand has clearly decreased.
Order backlogs decreased -2.0 percentage points to 49.5% and into contraction. More order backlogs would imply a need to ramp up even more production and (hopefully) more new employees to reduce them. This contraction is seemingly with a broad group of industries: Textile Mills; Plastics & Rubber Products; Petroleum & Coal Products; Miscellaneous Manufacturing; Paper Products; Food, Beverage & Tobacco Products; Furniture & Related Products; Computer & Electronic Products; and Primary Metals.
Imports decreased by -1.5 percentage points to 52.5%. 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. In essence, this is a negative sign which is really a positive one, but only with increased domestic figures.
New orders destined for export, or for customers outside of the United States declined by -1.0 percentage point to 47.5% and thus deeper into contraction. This is really not good and implies a global slowdown, which will impact the U.S. economy.
Prices popped up for the month but are still decreasing, abet at a slower rate. Prices increased by +4.0 percentage points to 39.0%. The ISM gives an index correlation to BEA price increases of 52.1%.
Customer's inventories decreased by -1.0 percentage points to 45.5%. 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. Seven industries in contraction is simply not a good sign.
Of the 18 manufacturing industries, 10 are reporting growth in March in the following order: Paper Products; Wood Products; Transportation Equipment; Fabricated Metal Products; Nonmetallic Mineral Products; Machinery; Chemical Products; Primary Metals; Food, Beverage & Tobacco Products; and Computer & Electronic Products. The seven industries reporting contraction in March — listed in order — are: Apparel, Leather & Allied Products; Textile Mills; Petroleum & Coal Products; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Plastics & Rubber Products; and Furniture & Related 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 43.1% to indicate economic growth (right). March alone gives a 2.6% annual real GDP correlation, yet for the quarter, indicates a 3.0% increase. The below graph plots real GDP, left scale, against PMI, right scale, real GDP up to Q4 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.
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.