The Institute for Supply Management’s (ISM) manufacturing index rose to 51.6 in September from 50.6 in August. While the number is up, the level is at best mediocre. However, it represents a major positive surprise. The consensus had been looking for the index to fall to 50.5.
In other words, the manufacturing economy is still expanding, but still very slowly. Still, if one steps back a bit, the decline in the overall index has been stunning. Back in February it was at 61.4, the highest level since the early 1980’s. However, the increase and the level being over 50 both argue strongly that we are not yet in a new recession.
This is a “magic 50 index” where any reading over 50 indicates that the manufacturing side of the economy is expanding and any reading under 50 indicates a contraction in manufacturing. The overall index has now been above the magic 50 mark for 26 straight months.
Manufacturing had been one of the stars of the recovery, but it is clearly fading. We were above 60 for four straight months earlier in the year — an extremely high level — but now we are stalled. Not moving backward into recession, but we have little forward momentum either.
That April reading had been matched or exceeded in only 89 months since the start of 1948, or 11.7% of the time. Almost all of those instances are ancient history. Since 1980, the April level been matched or exceeded only 19 times, or 5.1% of the months. The graph shows the history of the overall index since January 1970.
The ISM index has a very long and venerable history; it used to be known as the Purchasing Managers Index or PMI. However, it is simply a survey of purchasing managers at various firms in different industries, and it does not weight by the size of the firm.
The overall index is made up of ten sub-indexes. Six of the indexes improved while three showed deterioration over last month, and one was unchanged. Seven are above the magic 50 level. The sub-indexes are as interesting as the overall index.
Below the Headline Number
When one digs below the headline number, this is still a fairly weak report. In terms of the current state of the economy, the most important of these is the production index. It rose 2.6 points to 51.2, returning to positive territory after a one-month contraction.
On the other hand, it was as high as 63.8 in April. The absolute level is one that points to anemic production growth. The production index fell below the magic 50 level in August after being above it for 26 straight months. That run started in June 2009, the “official” end of the Great Recession. Nine industries reported an increase in production while seven saw production fall in September.
However, the index with the biggest impact on the very short-term is the backlog of orders. This was probably the most troubling number in the report. The order backlog sub-index plunged 4.5 points, and is now at only but only 41.5. That is both the lowest level of any of the sub-indexes, and the largest drop.
That is the fourth month in a row the backlog of orders has been below the 50 mark. It was at 61.0 in April. The order backlog sub-index has been extremely erratic of late.
Only three industries reported an increase in August, while ten reported declines. This points to more short-term softness in the manufacturing sector. In terms of economic activity, the production index is trailing, since it is about what the firms were actually producing in September. The backlog of orders gives a better indication of where things are going in the near future, or what is happening right now.
Looking just a bit further out, as existing orders in the backlog are worked off, they need to be replaced with new orders. The new orders sub-index held up better than the backlog, but was still troubling. It was unchanged this month, but at a sub-50 level of 49.6.
In other words, new orders are declining at the same pace they were last month. It is not a collapse, but a slow erosion. This is the fourth month in a row below the magic 50 level. The last time it was below 50 was in June of 2009, the month the Great Recession officially ended.
This is not a good omen for the next few months. Back in April, the new orders index was at 61.7. Seven industries reported higher new orders while nine reported a decline in new orders.
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