US: ISM Mfg Index

Thu Feb 01 09:00:00 CST 2018

Consensus Consensus Range Actual Previous Revised
ISM Mfg Index - Level 58.6 57.7 to 60.0 59.1 59.7 59.3

Overheating has to be the concern of ISM's manufacturing sample where the January index came in at 59.1, a level held down by a slowing in employment which may signal that the sample can't find enough people to keep up production. Production has been in the mid-60s the past 3 months which has been slowing delivery times which are at 59.1. Both of these are showing the strongest rates of upward change since the easy comparisons early in the post-2008 expansion.

New orders just keep pouring in, at 65.4 in January which is also the best in nearly 10 years, and likewise for backlogs at 56.2. And there's pressure very evident in input costs which are at 72.7 for the highest level in 6-1/2 years.

Employment is the weak link in the January report, slowing nearly 4 points to what however is still 54.2 to indicate a solid monthly net increase in the sample's staffing. This report has been sending loud signals of sharp acceleration for the last year, and acceleration is now beginning to take hold in government data, at least in some of the data most notably factory orders and shipments. If the factory sector does indeed begin to overheat, we can look back at this report and also the regional factory reports led by the Philly Fed as offering the first signals.

Market Consensus Before Announcement
January's consensus for the ISM manufacturing index is 58.6 vs a revised 59.3 in December (59.7 initially reported) when unusual strength across readings -- in stark contrast to the Federal Reserve's "modest" assessment of overall factory activity -- was once again the outcome. New orders, at 69.4, hit a 14-year high in December in results that included unusual strength for export orders, production, backlog orders, and employment.

The manufacturing composite index from the Institute For Supply Management 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 adjusted 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.