Having explained the limits of economic indicators, perhaps it’s unfair to hit you with a discussion of another one.
But given the overwhelmingly bearish nature of this month’s US economic data (especially in the housing market) the surprisingly positive ISM numbers are worth further, detailed consideration.
But first an apology. In our earlier economic roundups — where we mentioned that Fed surveys from various districts had indicated slower manufacturing activity — we failed to notice a few indicators that were painting a slightly prettier picture of the sector.
From Econbrowser:
As long as I’m passing along the not-as-awful-as-we-thought spin on the economic news, I should also mention that the Fed’s index of industrial production grew by 1% in July. That’s 12% at an annual rate, if we were lucky enough to see it repeated for a whole year– no danger of that, unfortunately. But the favorable industrial production numbers were likely a key factor that helped pull both the Chicago Fed National Activity Index and the Aruoba-Diebold-Scotti Business Conditions Index back up to zero, away from the alarmingly negative numbers with which both had flirted last month.
And as for Wednesday’s ISM numbers, the following chart from the report places them in the context of what’s been happening in the past year:
THE LAST 12 MONTHS
| Month | PMI | Month | PMI | |
|---|---|---|---|---|
| Aug 2010 | 56.3 | Feb 2010 | 56.5 | |
| Jul 2010 | 55.5 | Jan 2010 | 58.4 | |
| Jun 2010 | 56.2 | Dec 2009 | 54.9 | |
| May 2010 | 59.7 | Nov 2009 | 53.7 | |
| Apr 2010 | 60.4 | Oct 2009 | 55.2 | |
| Mar 2010 | 59.6 | Sep 2009 | 52.4 | |
| Average for 12 months – 56.6 High – 60.4 Low –52.4 |
||||
So, the index is now near the median and average of the last twelve months, with the pace of growth expanding again after declining the previous two months. Given that forecasters had been expecting a decline to 53, that could explain the market’s favorable reaction (to the extent that anything can).
And here is the breakdown by industry:
The 11 industries reporting growth in production during the month of August — listed in order — are: Apparel, Leather & Allied Products; Primary Metals; Electrical Equipment, Appliances & Components; Miscellaneous Manufacturing; Paper Products; Transportation Equipment; Fabricated Metal Products; Machinery; Food, Beverage & Tobacco Products; Computer & Electronic Products; and Chemical Products. The four industries reporting a decrease in production in August are: Petroleum & Coal Products; Nonmetallic Mineral Products; Furniture & Related Products; and Printing & Related Support Activities.
The improvement in the index also included good news from its employment component, which climbed from 58.6 per cent in July to 60.1.
So all things considered, a healthy report. But we’re not known for our sunny dispositions around here, and we wouldn’t be doing our jobs if we didn’t point out the dark linings in the otherwise silver cloud.
Or at least one of them — the new orders index, which declined for the fourth straight month:
| New Orders |
% Better |
% Same |
% Worse |
Net | Index |
|---|---|---|---|---|---|
| Aug 2010 | 29 | 49 | 22 | +7 | 53.1 |
| Jul 2010 | 27 | 53 | 20 | +7 | 53.5 |
| Jun 2010 | 36 | 50 | 14 | +22 | 58.5 |
| May 2010 | 50 | 38 | 12 | +38 | 65.7 |
Still, the decline wasn’t very steep.
One broader concern has nothing to do with the report itself. After all, this is just one indicator.
But given that labour productivity in manufacturing has been increasing for years, and especially of late, it’s unclear how much even a rapidly growing manufacturing sector would put a dent in unemployment. We recently highlighted the work of economists, for instance, who found that employment in US manufacturing has declined by a fifth in the last fifteen years despite consistently increasing output.
While we’re on the subject, today’s ADP report of private employment noted that while the service sector added 30,000 jobs in August, manufacturing sector jobs declined by 10,000.
And as it is unemployment that has taken up a lot of the Fed’s time lately, best not to abandon the QE2 ship just yet.
Related links:
August 2010 Manufacturing ISM report – ISM
Disembark the QE2 – FT Alphaville