Today the Institute for Supply Management published its October Manufacturing Report. Today's headline PMI at 51.7 percent is showing expansion for the second month after three months of contraction. The Briefing.com consensus was for 51.0 percent.
Here is the report summary:
The PMI™ registered 51.7 percent, an increase of 0.2 percentage point from September's reading of 51.5 percent, indicating growth in manufacturing at a slightly faster rate. The New Orders Index registered 54.2 percent, an increase of 1.9 percentage points from September, indicating growth in new orders for the second consecutive month. The Production Index registered 52.4 percent, an increase of 2.9 percentage points, indicating growth in production following two months of contraction. The Employment Index registered 52.1 percent, a decrease of 2.6 percentage points, and the Prices Index registered 55 percent, reflecting a decrease of 3 percentage points. Comments from the panel this month reflect continued concern over a fragile global economy and soft orders across several manufacturing sectors.
I have been 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 51.5 is expansionary. 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, 51.7, 53.2, 66.2
Nine were lower than the latest data, and two were higher (the recessions that began in 1969, 1973). 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 0.2 point change from last month? There are 778 monthly data points in this series. The average month-to-month point change is 2.01 points. So today's headline PMI number is essentially unchanged from last month.
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.