ISM Manufacturing Contracts for 3rd Month in a Row - PMI 49.6% for August 2012

The August 2012 ISM Manufacturing Survey PMI decreased, -0.2 percentage points, to 49.6% and is in contraction for the 3rd month in a row. In July 2009 the PMI registered 49%. Shrinkage is the theme of August's ISM manufacturing survey as the shadows of 2009 infiltrate this report.



New Orders decreased -0.9 percentage points, to 47.1%. New Orders inflection point, where expansion turns into contraction, is not 50, it is 52.3%.

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.



The ISM manufacturing index is in stark contrast to the Census report which showed manufacturing new orders increased 2.8% for July, even though the ISM claims the two statistics are consistent with each other. To wit, 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). Here we do see a consistent pattern between the two.



PMI is a composite index on manufacturing. Here's how the ISM defines PMI:

The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with equal weights: New Orders, Production, Employment, Supplier Deliveries and Inventories.

Below is the ISM table data, reprinted, for a quick view.

Manufacturing at a Glance August 2012
Index August July % Point Chg. Direction Rate Trend
PMI 49.6 49.8 -0.2 Contracting Faster 3
New Orders 47.1 48.0 -0.9 Contracting Faster 3
Production 47.2 51.3 -4.1 Contracting From Growing 1
Employment 51.6 52.0 -0.4 Growing Slower 35
Supplier Deliveries 49.3 48.7 +0.6 Faster Slower 7
Inventories 53.0 49.0 +4.0 Growing From Contracting 1
Customers' Inventories 49.0 49.5 -0.5 Too Low Faster 9
Prices 54.0 39.5 +14.5 Increasing From Decreasing 1
Backlog of Orders 42.5 43.0 -0.5 Contracting Faster 5
Exports 47.0 46.5 +0.5 Contracting Slower 3
Imports 49.0 50.5 -1.5 Contracting From Growing 1
OVERALL ECONOMY Growing Slower 39
Manufacturing Sector Contracting Faster 3


Production, which is the current we're makin' stuff now meter, plunged -4.1 percentage points from last month to 47.2% and moved into contraction. The production index hasn't shown contraction since May 2009. ISM's manufacturing production index loosely correlates to the Federal Reserve's industrial production, but not at 50%, instead 51.2% to indicate growth.

This indicates growth for the 37th consecutive month. An index above 51.2 percent, over time, is generally consistent with an increase in the Federal Reserve Board's Industrial Production figures.



The manufacturing ISM employment index dropped -0.4 percentage points to 51.6% and is also at it's lowest point since November 2009. The neutral point for hiring vs. firing is 50.1%. Employment is a lagging indicator, so expect more declines.

Below are the BLS manufacturing non-farm payrolls (jobs) for the past decade on the left, in red, graphed against the ISM manufacturing employment index on the right, in blue. The BLS number is simply raw manufacturing jobs tally, from the CES, not taking into account population growth or overall sector shrinkage as well as time lag. One can eyeball a slight correlation in the middle of the decade, yet note the divergence this recovery, starting late 2008.



Inventories increased another +4.0 percentage points to 53.0% and moved into expansion. The ISM claims inventories are correlated to manufacturing inputs, that are part of GDP. Changes in private inventories subtracted -0.23 percentage points to Q2 2012's 1.7% GDP, but this is all inventories, not just manufacturing.

An Inventories Index greater than 42.8 percent, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall 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 49.3% and the ISM reports this it the 7th month supplier deliveries have been faster, although the rate of change slowed.



Backlog of orders dropped another -0.5 percentage points to 42.5% and are in contraction for the 5th month in a row. Order backlogs are exactly what they sound like and only 86% of survey respondents reported on order backlogs.



Imports dropped -1.5 percent points to 49.0% and moved into contraction. Imports are materials from other countries manufacturers use to make their products.



New orders destined for export, or for customers outside of the United States, increased +0.5 percentage point to 47.0% and is in contraction, the 3rd month in a row. Export new orders last contracted in June 2009. The exports index is also lower than June 2009's 49.5% and was in growth up to this point for 35 months.



Prices soared by +14.5 percentage points to 54.0%, the 1st month in an increase trend. Prices are what manufacturers pay to make their products. In April 2009 the price subindex was 32%.



Customer's inventories decreased -0.5 percentage points to 49.0%. Below 50 means customer's inventories are considered by manufacturers to be too low. Customer inventories, not to be confused with manufacturer's inventories, is how much customers have on hand, or rates the level of inventories the organization's customers have. An increase might indicate weak demand.



Comments from ISM survey respondents were not as bleak as the data. Two which stood are out this one from transportation manufacturing:

Auto industry slowing a bit in the second half.

and this one from Food processing manufacturers:

U.S. drought severely impacting raw materials prices.

Machinery also mentioned a slow down in capital goods, equipment that is an investment.

Here is the ISM industrial sector ordered list of growth and contraction:

Of the 18 manufacturing industries, eight are reporting growth in August in the following order: Printing & Related Support Activities; Primary Metals; Food, Beverage & Tobacco Products; Petroleum & Coal Products; Apparel, Leather & Allied Products; Paper Products; Chemical Products; and Miscellaneous Manufacturing. The eight industries reporting contraction in August — listed in order — are: Textile Mills; Nonmetallic Mineral Products; Furniture & Related Products; Computer & Electronic Products; Electrical Equipment, Appliances & Components; Transportation Equipment; Fabricated Metal Products; and Machinery.

The ISM has a correlation formula to annualized real GDP, but they are now noting the past correlation. Notice also that the PMI went to equal weighting in 2008. Annualizing August's data, the ISM get a 2.4% 2012 annual real GDP. The below graph plots real GDP, left scale, against PMI, right scale. One needs to look at the pattern of the two lines to get anything out of this graph. If they match, GDP goes up, PMI goes up, would imply some correlation.



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. For example, A manufacturing PMI above 42, over time, also indicates growth, even while manufacturing is in the dumpster.

Here is last month's manufacturing ISM overview, unrevised.

The ISM has much more data, tables and analysis on their website. For more graphs, see St. Louis Federal Reserve Fred database and graphing system.

PMI™ stands for purchasing manager's index.

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