Monday, February 3, 2014

An overreaction to the ISM manufacturing report?

Today's ISM manufacturing PMI number spooked jittery US equity investors, sending stocks sharply lower (with VIX climbing above 20). The headline number came in about 9% below expectations.


In particular, the markets reacted negatively to the "new orders" component of the ISM index. It registered the largest one-month decline in some 33 years.

Source: Institute for Supply Management

Has the US manufacturing sector experienced a significant decline in January? As discussed before (see post), the ISM measure tends to be volatile and often diverges from other manufacturing indicators. Alan Tonelson (MarketWatch) had a nice write-up on the topic this morning. The ISM index overshot on the way up and is potentially overshooting on the way down.
MarketWatch: - The ISM seems to do a good job capturing huge swings in manufacturing output and employment reported by the Fed and the BLS. But any finer changes too often contrast strikingly with the government numbers — which are both based on much bigger, more varied sets of evidence than the ISM’s survey of 400 member companies. These discrepancies, plus the anomalies in the institute’s own figures, strongly suggest that anyone serious about following American manufacturing’s fortunes needs to look far beyond the ISM.
The best place to look beyond the ISM report, particularly where we get timely data, is the Markit Manufacturing PMI. And indeed there has been a downward move in manufacturing growth, but nothing as extreme as what we heard from the Institute for Supply Management.
Chris Williamson, Chief Economist at Markit: - Survey respondents reported the weakest growth of output and new orders for three months in January, but with many companies blaming exceptionally cold weather for production and supply chain disruptions, the underlying trend looks to have remained robust.

The ongoing expansion suggests that the goods producing sector is on course to contribute to another quarter of solid economic growth in the first quarter, and is also helping sustain a decent rate of job creation. The survey is broadly consistent with ... 10,000 jobs being created per month in the manufacturing sector which, added to the signal from the flash services PMI, points to non-farm payroll growth in the region of 200,000 in January.
It seems that some of the manufacturing softness is the result of the knock-on effects from the frigid weather we've seen earlier. If so, we should see a rebound in February. Whatever the case, the market reaction to the ISM numbers may be a bit premature.
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