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ISM Manufacturing Business Activity Index Expands

  • Written by Syndicated Publisher No Comments Comments
    January 4, 2013

    This week the Institute for Supply Management published its November Manufacturing Report. Thes headline PMI of 50.7 percent is showing a return to expansion after a month of contraction. The Briefing.com consensus was for 50.5 percent.

    Here is an analysis from the report:

    The PMI™ registered 50.7 percent, an increase of 1.2 percentage points from November’s reading of 49.5 percent, indicating expansion in manufacturing for only the third time in the last seven months. This month’s PMI™ reading moved manufacturing off its low point for 2012 in November. The New Orders Index remained at 50.3 percent, the same rate as in November, indicating growth in new orders for the fourth consecutive month. The Production Index registered 52.6 percent, a decrease of 1.1 percentage points, indicating growth in production for the third consecutive month. The Employment Index registered 52.7 percent, an increase of 4.3 percentage points, indicating a resumption of growth in employment following only one month of contraction since September 2009. Both the Exports and Imports Indexes registered 51.5 percent, returning both indexes to growth territory following consecutive periods of contraction of six and four months, respectively. Comments from the panel this month are mixed, with some indicating a strengthening of demand and others indicating a continuing softness in demand. Additionally, many respondents express uncertainty about government regulations, taxes and global economics in general as we approach 2013.

    As I’ve previously pointed out, I’m reluctant to put very much focus on this index for various reasons, but they are essentially captured in Briefing.com’s Big Picture comment on this economic indicator.

     

    This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.

     

    The chart below shows the Manufacturing series, which stretches back to 1948. I’ve highlighted the eleven recessions during this time frame and highlighted the index value the month before the recession starts.

     

     

    For a diffusion index, the latest reading of 49.5 indicates contraction. What sort of correlation does that have with the months before the start of recessions? Here are the eleven data points for the months before recessions arranged in numeric order with the latest data pointed inserted in the sequence (highlighted in red).

     

    42.1, 44.8, 45.7, 47.2, 47.8, 48.5, 49.2, 50.5, 50.7, 50.7, 53.2, 66.2

     

    Eight were lower than the latest data, and two were higher (the recessions that began in 1969, 1973). Note that one recession, the second half of the early 1980s double-dip was also at 50.7 when it began. The two extremes are rather interesting: At the high end is the month before the recession triggered 1973 Oil Embargo. The economy was clearly blindsided. At the low end was the recession following the Dot.com bust.

    But how revealing is today’s 1.2 point change from last month? There are 780 monthly data points in this series. The average month-to-month point change is 2.01 points. So today’s headline PMI number is smaller than the mean change.

    To reiterate the Briefing.com assessment: “The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle.” The ISM reports nevertheless offer an interesting sidebar to the ongoing economic debate.

    Note: I use the FRED USRECP series (Peak through the Period preceding the Trough) to highlight the recessions in the charts above. For example, the NBER dates the last cycle peak as December 2007, the trough as June 2009 and the duration as 18 months. The USRECP series thus flags December 2007 as the start of the recession and May 2009 as the last month of the recession, giving us the 18-month duration. The dot for the last recession in the charts above are thus for November 2007. the “Peak through the Period preceding the Trough” series is the one FRED uses in its monthly charts, as illustrated here.

     

    Images: Flickr (licence attribution)

     

    About The Author

    My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

    My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

    Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

    Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.

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