February 3, 2014

January 2014 ISM Manufacturing, With a Contrarian View (Report: 51.3%; Big Comedown and Big Expectations Miss)

Filed under: Economy,Taxes & Government — Tom @ 9:56 am

The report will be out at 10:00 a.m. (Update, 10:05 a.m.: Make that “10:00 a.m. or so”) Business Insider’s prediction is for 56.0%, down from December’s 57.0% (Update, 10:20 a.m.: ISM recalibrated its seasonal adjustments in this report, changing December to 56.5%). Any reading above 50% indicates expansion.

In advance of that, a column by Alan Tonelson at MarketWatch makes a pretty good case that the Institute for Supply Management’s Manufacturing Index, even with the caveat that it’s a survey and not a hard measurement, has become ineffective in what it’s supposed to do:

How reliable are ISM manufacturing readings? Not very
Opinion: Manufacturing output, job growth overstated by surveys

… Its surveys of domestic industry’s health have been generating encouragingly strong numbers since the U.S. economic recovery began in mid-2009. More specifically, the ISM’s headline figures signal that American manufacturing has not simply staged a cyclical comeback from a deep recessionary dive, but has been strengthening independent of the broader economy’s fortunes.

Yet these encouraging ISMs have been accompanied by government manufacturing readings painting a very different picture — of a domestic factory sector whose rebound has been entirely cyclical and unmistakably petering out. Worse, the gap between rosy ISM results on the one hand, and the glummer data on manufacturing production and jobs from the Federal Reserve and the Bureau of Labor Statistics on the other, has been widening markedly for 20 years.

… Perhaps most unusually, 2013’s rate of manufacturing growth after inflation was matched by 1995’s performance, according to the Fed. But the 1995 ISM was not the same as 2013’s 53.7, but 49.5, a below-50 figure that indicates contraction.

Just as revealing: In both 1996 and 2010, the nation’s factory output grew by just under 7% after inflation. But the former’s ISM was a feeble 50.1 and the latter’s a robust 57.3.

The ISM seems to do a good job capturing huge swings in manufacturing output and employment reported by the Fed and the BLS. But any finer changes too often contrast strikingly with the government numbers — which are both based on much bigger, more varied sets of evidence than the ISM’s survey of 400 member companies. These discrepancies, plus the anomalies in the institute’s own figures, strongly suggest that anyone serious about following American manufacturing’s fortunes needs to look far beyond the ISM.

Yours truly has noted how ISM’s index hasn’t seemed to reflect underlying reality for some time. At first, I thought there might be some cooking going on, but was reassured by ISM that it isn’t possible.

Now I believe it’s more likely a matter of the ISM survey responsdents not reflecting the overall manufacturing facility universe.

With that, let’s wait for today’s numbers.

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HERE THEY ARE (permanent link):

Economic activity in the manufacturing sector expanded in January for the eighth consecutive month, and the overall economy grew for the 56th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.

“The January PMI® registered 51.3 percent, a decrease of 5.2 percentage points from December’s seasonally adjusted reading of 56.5 percent. The New Orders Index registered 51.2 percent, a significant decrease of 13.2 percentage points from December’s seasonally adjusted reading of 64.4 percent. The Production Index registered 54.8 percent, a decrease of 6.9 percentage points compared to December’s seasonally adjusted reading of 61.7 percent. Inventories of raw materials decreased by 3 percentage points to 44 percent, its lowest reading since December 2012 when the Inventories Index registered 43 percent. A number of comments from the panel cite adverse weather conditions as a factor negatively impacting their businesses in January, while others reflect optimism and increasing volumes in the early stages of 2014.”

Of the 18 manufacturing industries, 11 are reporting growth

“Weather” should be of limited relevance in a survey such as this.

The kinds of decreases we’re seeing are more than “weather.” The two I bolded (New Orders and Production), both of which have high relevance to GDP, nosedived. The third key GDP-related element, Backlog of Orders, went into contraction, declining from 51.5% to 48.0%.

The overall reading and the GDP reflectors are still in expansion, but not by much.

This seems to be far more than a one-month dip attributable purely to “weather.”

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UPDATE, 10:30 a.m.: Let’s see how well the business press picks up this point from the report’s spokesperson, noted at Zero Hedge

ISM’S HOLCOMB SAYS WEATHER DOESN’T ACCOUNT FOR ENTIRE SLOWDOWN

ZH also says today’s report represents the “biggest miss (vs. expectations) on record.”

UPDATE 2: My CNN email indicated that the markets opened at breakeven this morning. So it seems that this ISM report, along with far worse than expected sales drops at Ford and GM, are what have driven the indices down by about 1% in first-hour trading.

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2 Comments

  1. This whole “weather” excuse for whenever bad economic news occurs under Obama is finally starting to tick me off. Weather is always going on, when don’t we have periods of extreme weather somewhere in our big country? That’s the way it has been since time immemorial.

    Comment by zf — February 3, 2014 @ 2:36 pm

  2. #1, especially b/c they should be considering the bad weather in their forecasts. To the extent that any of them did (and I think at least some of them did), then’s it’s non-operative excuse.

    Comment by Tom — February 3, 2014 @ 3:15 pm

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