US: ISM Mfg Index

Mon Feb 02 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
ISM Mfg Index - Level 54.5 53.5 to 56.5 53.5 55.5 55.1

ISM growth had been running hot compared to other manufacturing reports but has slowed down noticeably the last two readings. January's composite score of 53.5 compares with a revised 55.1 in December and 57.6 in November. October was the fourth quarter's peak at 57.9.

New orders slowed substantially in January, to 52.9 from 57.8. In contrast, order growth during November and October was in the low 60s. Weakness in foreign demand is a key factor here as new export orders fell 2.5 points to a sub-50 reading of 49.5. This is the lowest for export orders since November 2012. Total backlog orders also moved into contraction, to 46.0 for a 6.5 point loss.

Production remained strong in part because of the working down of backlogs. A big headline is prices paid which fell 3.5 points to 35.0 which is very low, the lowest reading since April 2009.

This report is a concern, reflecting weak foreign markets and also troubles in the oil patch. The ISM wasn't the first to signal slowing for the manufacturing sector but it now heavily underscores prior indications.

Market Consensus Before Announcement
The composite index from the ISM manufacturing survey for December came in at 55.5, down a sizable 3.2 points from November for the slowest rate of monthly growth in six months. Growth in new orders slowed substantially, to 57.3 from November's exceptionally strong 66.0, while backlog accumulation also slowed, to 52.5 from 55.0. Production slowed to 58.8 vs 64.4. But employment was a positive in the report, up 1.9 points to 56.8 which is very solid for this reading. Also adding to the composite was a slowdown in delivery times which, however, reflects the labor-related slowdown at West Coast ports.

The ISM manufacturing composite index is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is transformed into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provide insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report which helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the bond market is highly sensitive to this report.

The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and is not subject to revision.

The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing index indicates whether manufacturing and the overall economy are growing or declining. Historically, readings of 50 percent or above are associated with an expanding manufacturing sector and healthy GDP growth overall. Readings below 50 indicate a contracting manufacturing sector but overall GDP growth is still positive until the ISM index falls below 42.5 (based on statistics through January 2011). Readings in between these two levels suggest that manufacturing is declining while GDP is still growing but only very slowly.

In addition to the ISM manufacturing composite index, the various sub-components contain useful information about manufacturing activity. The production component is related to industrial production, new orders to durable goods orders, employment to factory payrolls, prices to producer prices, export orders to merchandise trade exports and import orders to merchandise imports.

Vendor (supplier) deliveries are an important component of report. The more slowly orders are filled and delivered, the stronger the economic growth and the greater the potential for inflation. When orders are filled quickly, it means that producers don't have as many to fill.

The ISM manufacturing composite index and its sub-components can be subject to some monthly volatility, making the three-month average of the monthly levels more indicative of the trend.