Nothing Contracts For May's Manufacturing Survey

The May ISM Manufacturing Survey shows nothing in manufacturing is shrinking again.  The composite PMI grew to a now safe 52.8% after a 1.3 percentage point increase.  Manufacturing employment came out of contraction as did inventories.  Exports move to no change.  Prices are still decreasing but not by much anymore.  Overall the report is a relief that things are not so bad.  Earlier many April economic indicators were pointing to another bad quarter.


ISM Manufacturing index


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.  Strong and steady are mentioned to describe demand.  Manufacturers also complain of a strong dollar hurting their products

New orders increased 2.3 percentage points to 55.8%.  This shows a clear pick up in new manufacturing orders.


ISM Manufacturing New Orders


The Census reported March durable goods new orders increased 4.0%, 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 May 2015
Index May 2015 April 2015 % Change Direction Rate of Change Trend Months
PMI™ 52.8 51.5 +1.3 Growing Faster 29
New Orders 55.8 53.5 +2.3 Growing Faster 30
Production 54.5 56.0 -1.5 Growing Slower 33
Employment 51.7 48.3 +3.4 Growing From Contracting 1
Supplier Deliveries 50.7 50.1 +0.6 Slowing Faster 24
Inventories 51.5 49.5 +2.0 Growing From Contracting 1
Customers' Inventories 45.5 44.0 +1.5 Too Low Slower 6
Prices 49.5 40.5 +9.0 Decreasing Slower 7
Backlog of Orders 53.5 49.5 +4.0 Growing From Contracting 1
Exports 50.0 51.5 -1.5 Unchanged From Growing 1
Imports 55.0 54.0 +1.0 Growing Faster 28
OVERALL ECONOMY Growing Faster 72
Manufacturing Sector Growing Faster 29


Production, which is the current we're makin' stuff now meter, decreased -1.5 percentage point increase to 54.5%.  This is still reasonable growth levels.  Production usually follows incoming orders in the next month.


ISM Manufacturing Production


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.


ism vs. fed industrial production


The manufacturing ISM employment index just came back up into hiring with a 3.4 percentage point bump to 51.7%.  This index really needs to be in the 60's to have real job creation,but this is certainly better than contraction.  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 also came out of contraction with a +2.0 percentage point monthly increase to 51.5%.  Inventories gives an estimate of how much raw materials manufacturers have on hand.  One must wonder if the West coast port slowdown had anything to do with depleting raw materials.  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.


ISM 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 0.6 percentage points to 50.7%.  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 finally came out of contraction and stand at 53.5%.  More order backlogs would imply a need to ramp up even more production and (hopefully) more new employees to reduce them.  This is a great sign.



Imports increased by 1.0 percentage points to 55.0%.  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.  More imports is really a negative sign for domestic economic growth, yet for manufacturers using cheap stuff to make other stuff, an increase is probably a good sign for the businesses at least.


ISM Manufacturing Imports


New orders destined for export, or for customers outside of the United States is the one bad thing in this month's report.  It is at the border, 50.0% and is unchanged from last month. . This could really imply a slow down in global demand.


ISM Manufacturing Exports


Prices are still decreasing but increased by a whopping 9.0 percentage points to 49.5%.  That's barely on the decrease cusp.  The ISM gives an index correlation to BEA price increases of 52.1%.



Customer's inventories increased by 1.5 percentage points to 45.5%.  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.


ISM Manufacturing Customer Inventories


Here is the ISM industrial sector ordered list of growth and contraction.  Notice there are only two industries in contraction.

Of the 18 manufacturing industries, 14 are reporting growth in May in the following order: Apparel, Leather & Allied Products; Furniture & Related Products; Paper Products; Food, Beverage & Tobacco Products; Nonmetallic Mineral Products; Plastics & Rubber Products; Electrical Equipment, Appliances & Components; Primary Metals; Transportation Equipment; Printing & Related Support Activities; Fabricated Metal Products; Machinery; Miscellaneous Manufacturing; and Chemical Products. The two industries reporting contraction in May are: Textile Mills; and Computer & Electronic 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).  April alone gives a 3.0% annual real GDP correlation, yet for the year, indicates a 2.9% increase.  The below graph plots real GDP, left scale, against PMI, right scale, real GDP up to Q1 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.




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.

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