Boy, that was some bullish July advance report on U.S. manufacturing put out by Markit.com on Friday! According to the respected research group: “US manufacturers are enjoying a summer of scorching growth. Output grew in July at a rate only just below the four-year peak seen in June as inflows of new orders surged higher again. The data suggest the sector is growing at an annualised rate of roughly 8%….”
In the same release, however, Markit inadvertently presented evidence for taking this conclusion with a gigantic boulder of salt. It’s the chart on page 2 showing the comparison over time between (a) its own measure of manufacturing output’s growth and (b) the growth recorded by the Federal Reserve’s index of industrial production. A big warning signal about the accuracy of Markit’s statistics is their consistent tendency during periods of manufacturing expansion to show considerably stronger growth than the Fed’s data (made clear from gaps between Markit’s blue line and the Fed’s brown line).
Now, it’s entirely reasonable to question whether the picture drawn by Fed data should be seen as gospel. But look at the Markit figures for much of 2010. Remaining in the high-50s neighborhood and sometimes topping 60, these output numbers track reasonably well with Fed statistics claiming that domestic manufacturing output rose by more than seven percent that year after inflation. Growth was this fast for an entirely un-renaissance-y reason: Manufacturing was recovering from a dizzying 20 percent real contraction during the recession.
The new Markit figures and analysis are fishy because their similar results – even topping the 60 mark most recently – diverge markedly and increasingly not only from the Fed’s manufacturing growth figure, but from so much of the other manufacturing data that’s been published this spring, and especially from the Census Bureau’s figures on business spending for so-called core capital goods (which strip out defense and aircraft-related orders). Does anyone really suppose that the sector today is growing as robustly as it was immediately after its worst downturn since the Great Depression?
Earlier this year, I documented in a Marketwatch.com article how poorly an even more widely followed gauge of manufacturing strength – the Institute for Supply Management’s Purchasing Managers’ Index – correlated with official manufacturing growth data going back 20 years. With a few more releases like its advance report for July, Markit’s own PMIs will start deserving considerable skepticism, too.