Diving Into the ISM: What's It All Mean?
February 3, 2015
by Mike "Mish" Shedlock
of Sitka Pacific Capital
This morning the Institute for Supply Management released its much followed Manufacturing ISM® Report On Business®.
Index
Jan
Dec
PP Change Direction
Rate of Change
Trend in Months
PMI®
53.5 55.5 -1.6
Growing
Slower
20
New Orders
52.9 57.8 -4.9
Growing
Slower
20
Production
56.5 57.7 -1.2
growing
Slower
11
Employment
54.1 56.0 -1.9
Growing
Slower
19
Supplier Deliveries
52.9 58.6 -5.7
Slowing
Slower
20
Inventories
51.0 45.5 5.5
Growing
From Contracting 1
Customers' Inventories 42.5 44.5 -2.0
Too Low
Faster
2
Prices
35.0 38.5 -3.5
Decreasing
Faster
3
Backlog of Orders
46.0 52.5 -6.5
Contracting From Growing
1
Exports
49.5 52.0 -2.5
Contracting From Growing
1
Imports
55.5 55.0 0.5
Growing
24
Faster
What's It Mean?
The PMI is a diffusion index. Numbers above 50 indicate expansion, numbers below 50 indicate contraction.
A key problem with diffusion indices is the size of the company does not matter. For example, a chemical company with 300
employees carries the same weight as an auto manufacturer with 200,000 employees.
Moreover, there are some peculiarities with the break-even number of 50.
The ISM says A PMI® in excess of 43.1 percent, over a period of time, generally indicates an expansion of the overall
economy. Therefore, the January PMI® indicates growth for the 68th consecutive month in the overall economy, and indicates
expansion in the manufacturing sector for the 20th consecutive month. Holcomb stated, "The past relationship between the
PMI® and the overall economy indicates that the PMI® for January (53.5 percent) corresponds to a 3.3 percent increase in real
gross domestic product (GDP) on an annualized basis."
Thus, a manufacturing PMI above or below 50, does not imply similar overall economic activity as one might expect. Also,
month-to-month changes show a lot a variances so it's important to look at trends over a longer period of time.
Manufacturing ISM Historical
image: http://3.bp.blogspot.com/-VYoSuuzK5dU/VM_o5MnG9qI/AAAAAAAAcRg/JseS7goLD4g/s400/ISM%2B2015-02.png
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The NBER (the historical arbiter of when recessions start and end) says a US recession began in November of 1973. The
Manufacturing ISM was 68.1 at the time.
The above chart also shows some recessions began with the manufacturing PMI in negative territory. In isolation, the PMI
itself does not say a lot. One needs to incorporate other data.
Manufacturing ISM Percent Change From Year Ago
image: http://3.bp.blogspot.com/-QWc4bunIGxs/VM_rK7Yu14I/AAAAAAAAcRs/4_nM1DFaKIQ/s400/ISM%2B2015-02A.png
Upturns from deeply negative tend to end recessions (purple circles), but spikes below the zero-growth tend line don't
necessarily mean anything.
There were 10 occasions since 1950 in which the year-over-year growth of manufacturing PMI sunk to -20% that were not
associated with a recession.
On the other hand, the chart shows that recessions generally start with the PMI near the zero-growth line. In those occasions
where recessions started with PMIs well above 50, the PMI quickly crashed into negative territory.
Manufacturing ISM Percent Change From Year Ago Detail
image: http://1.bp.blogspot.com/-XAbaCbGjWUw/VM_vZJm8o1I/AAAAAAAAcR8/2Hy27P_fnS0/s400/ISM%2B2015-02B.png
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Far too much reliance is given to these indicators, even though flirting around the zero-line is generally not associated with
high growth.
The Manufacturing ISM is now at a spot where recessions frequently begin. Yet, far more often than not, recessions do not
begin at this spot.
Nonetheless, please note the weakening trends in the table at the top.
Exports are slowing
Imports are up
Prices falling rapidly
Backlog of orders in contraction
Growth slowing nearly everywhere
Customer inventories rising
None of those imply strong growth.
The ISM says today's report "corresponds to a 3.3 percent increase in real gross domestic product (GDP) on an annualized
basis". I will take the under for numerous reasons stated previously.
For more GDP look-ahead analysis, please see ...
January 31: Diving Into the GDP Report - Some Ominous Trends - Yellen Yap - Decoupling
or Not?
February 02: Total Construction Spending Weaker Than Expected; Residential
Construction Spending in Contraction
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February 02: Four Trade War Questions; PMI Reports; Currency Manipulation Charges
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Read more at http://globaleconomicanalysis.blogspot.com/2015/02/diving-into-ism-whats-it-allmean.html#6W52PiP70AzaSqyV.99
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