Today’s ISM manufacturing report, with its headline number of 54.7, provides early evidence that the post-election enthusiasm regarding a pickup in the economy, as signaled by a variety of business and consumer confidence surveys, may already be beginning to yield results in terms of actual activity.
The monthly ISM manufacturing survey has a very long track record (going back to 1948) of providing largely accurate and timely signals on the direction of the economy.
{mosads}Over the years, manufacturing has become a smaller piece of the overall economy, as services industries have grown in importance, but the ISM survey of purchasing managers at the nation’s factories still seems to provide helpful signals about the direction of the economy.
Even with the manufacturing sector’s diminishing weight in the broad economy, it should not be surprising that the ISM survey still yields solid insights — purchasing managers at the nation’s factories count firms across the various parts of the economy as customers.
The order books of manufacturers often provide leading indications about the tenor of demand among businesses and consumers at any given point in time.
Another advantage inherent in the ISM manufacturing survey data is its timeliness. The monthly reports are released on the first business day of each month.
To be fair, the survey respondents are mostly filling out their surveys in the first half each month. For example, most of the surveys for the December ISM gauge, released today, would have been completed by around mid-December.
Still, firms reporting on their own order books, production, employment, etc., even with a few weeks’ lag, are providing more up-to-date intelligence than most of the high-profile government statistical releases.
Finally, the ISM report is compiled differently than most other major economic data releases. For employment, retail sales, factory orders, etc., firms report the levels of their own activity and these are summed up into an aggregate level (with the monthly change typically providing the lead news headlines).
In contrast, the ISM surveys are compiled into diffusion indices, a process that essentially means one firm, one vote. The ISM responses are divided into those firms reporting an increase in activity (say, production), those reporting a decline, and those reporting no change.
If the number of firms reporting an increase is equal to the number reporting a decrease, the index will register 50, the break-even mark. Anything above 50 means that there are more firms reporting gains than declines and vice versa.
Thus, while swings in activity at a few giant firms (for example, Wal-Mart for retail sales, or Boeing for factory orders) can have a massive impact on the aggregates for most economic variables, the ISM gauges measure the breadth of expansion/contraction and thus provide a different angle on measuring the economy, and, as it turns out, a helpful one.
Which brings us back to today’s December ISM manufacturing survey report. The diffusion index rose by 1.5 to 54.7, comfortably above the break-even mark of 50, but certainly not an extraordinary level of activity.
What is noteworthy, however, is the ongoing recovery in manufacturing activity in recent months, as the headline measure posted its fourth straight monthly increase. Purchasing managers reported broad-based gains in new orders and production, as well as rising price pressures for their raw material inputs.
Of course, the evidence so far is preliminary and tentative. We will want to see confirmation in other more official data, such as employment, retail sales, and GDP, over the next several months.
However, given the long and mostly accurate track record of the ISM manufacturing survey over the past almost 70 years, it probably would not be a good idea to bet against it.
Stephen Stanley is the chief economist for Amherst Pierpont. Stanley is a frequent guest on CNBC and Bloomberg TV, where he has provided on-air commentary regarding the various economic indicators in U.S. financial markets.
The views expressed by contributors are their own and not the views of The Hill.