Tuesday, December 1, 2009

November ISM Manufacturing disappoints

- by New Deal democrat

The Institute for Supply Management's Manufacturing Index was reported this morning at 53.6. (This is a diffusion index; any reading above 50 indicates expansion. The higher the number above 50, the more the expansion). Just as importantly, the ISM Manufacturing Employment Index was reported at 50.8; and supplier deliveries fell to 55.7. These all indicate continued expansion, but at a slower pace. Only new orders and exports increased at a faster pace. Inventories did shrink, a good sign as to the need for manufacturers to increase production to restock.

In summary, this means that manufacturing continues to expand, but at a slightly slower pace. Employment in manufacturing is just barely positive. The Supplier deliveries component is an LEI, and this in conjunction with November consumer sentiment and most importantly housing permits means that it is likely that for the first time since March, November LEI will print negative.

It is instructive to review the ISM Manufacturing Index since its post-WW2 inception. From 1948 through 1983, the economy relied much more upon manufacturing than it does today. There were repeated booms and busts, as shown on this graph:

Note how often the index fell below 40 and sometimes to 30 in recessions, and how frequently in expansions thereafter it reached not just 60, but sometimes as high as 70.
Now take a look at the same graph from 1984 to the present, a period of 25 years:

During the 1991 and 2001 recessions, the index almost never fell below 40 -- but on the other hand, the index only exceeded 60 during 9 of the 300 months since 1984. This is a symptom of what was euphemistically called "The Great Moderation" (R.I.P.).

Now let's look at the employment index and compare it with the manufacturing index.

Here is the same graph from 1948 to 1984, but with employment added in red:

There are two things to notice: (1) the red line moves up across 50 (indicating generally that more employers are hiring than not) after the blue line, meaning that manufacturing expansion comes before jobs grow; and (2) jobs start to grow very quickly and as equally strongly after manufacturing does.
Next, here's the same comparison graph from 1984 to the present:

The red line still moves up after the blue one, but notice how long it takes to rise over 50, indicating expansion. Until now (note: today's number isn't included on the graph) -- the blue line moved above 50 in August, and red line followed only 2 months later in October.

Today's decline to 53.8 is still consistent with numbers which in the past had coincided with actual job growth (the inflection point being at 53.0), but has not been so this time, due to how hard retail and services employment were hit in this recession.

Finally, let's look at overtime hours in the manufacturing sector. Here again there has been a sharp rebound, although not by a long shot making up all the time lost since 2007:

Overtime has already risen .6 hours. It took 10 months after the 1991 expansion to rise that much - and a full 2 years after 2001!

Simply put, while manufacturing (including employment in manufacturing) is having a more robust recovery than in either 1992 or 2002 - primarily due to cutting too far during the recession, and export sales to foreigners whose standard of living unlike that of Americans is still improving - it still isn't really V shaped.

Just as importantly, in our domestic economy, manufacturing this year is the relative bright spot, while the US consumer continues to struggle as indicated by Invictus' post earlier this morning.

From Bonddad:

NDD labeled this a disappointment. I disagree for the following reasons:

On the chart notice the overall trend is still higher. In addition, notice the last four readings have clustered in positive (expansion) territory. So long as we have a reading above 50 we're expanding. That's good news.

Consider these points from the report

  • "Becoming concerned about the value of the U.S. dollar." (Apparel, Leather & Allied Products)
  • "Low value of the dollar driving commodity costs higher." (Food, Beverage & Tobacco Products)
  • "Demand from automotive manufacturers remains strong and building." (Fabricated Metal Products)
  • "Capital construction seems to be picking up, and we are seeing more jobs that are bid out." (Electrical Equipment, Appliances & Components)
  • "Steady increase in business." (Primary Metals)
While there is concern with commodity prices, also note that the last three comments deal with increased activity in three different areas. These comments are included because they are representative of what people are hearing. Simply put, this is more good news.

A quick note in response by NDD:

I agree with Bonddad that in terms of the economy as a whole, there is no doubt this indicates continued expansion, at least for now. At this point, though, I am filtering all economic news through the prism of whether this will be a "jobless recovery" or not, and in that regard I am looking for a stronger "V" than this report shows.