(What’s Left of) Our Economy: Why Tariff-Induced Gloom Looks Sillier than Ever

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inflation, Institute for Supply Management, ISM, manufacturing, Markit.com, PMI, Purchasing Managers' Index, survivorship bias, tariffs, Trade, trade war, {What's Left of) Our Economy

Look – I’m hardly the world’s biggest fan of the monthly private sector national manufacturing surveys that purport to reveal the state of American industry. I’ve reported on their consistent failure to track the actual performance of domestic manufacturers compared with the results of the official (and much more comprehensive) data, and explained that a main reason is that the surveys suffer from “survivorship bias.”

Still, since they’re both so widely followed, it’s crucial to note that both the October report released by the Institute for Supply Management this morning, and its counterpart from Markit.com, show that the sector is doing just fine. More specifically, since these results track well with the latest government figures on manufacturing, they represent even more evidence that claims of tariff-induced manufacturing devastation are Fake News.

The headline number for the October ISM (57.7) was indeed lower than its September edition (59.8). It’s also lower than the average for the last twelve months (59.2). But it’s not much lower. Even more important – any reading above 50 signals expansion. And although the comments from various industries contained were full of tariff-related concerns, according to Timothy R. Fiore, who oversees the reports, they “reflect continued expanding business strength.”

Many of the internals also showed American manufacturing remains firmly in growth mode. In particular, new orders and employment both continued increasing. Yes, they were increasing at slower paces than in September. But businesses believing that big trouble lies ahead usually don’t keep ordering more stuff (and manufacturers’ customers generally include other manufacturers as well as companies in other parts of the economy) and adding more workers. They start pulling back.

The Markit.com October U.S. manufacturing Purchasing Managers’ Index (PMI) revealed even stronger reasons for optimism about domestic manufacturing’s foreseeable future, and for its ability to thrive despite any near-term hits delivered by Trump-ian trade policies.

Markit.com also uses 50 as its dividing line between expansion and contraction, and it emphasized that is 55.7 score for October was a five-month high. In addition, it “signalled a further pick up in growth momentum and a strong improvement in the health of the manufacturing sector.”

And the internals? If anything, they were even better. Markit.com did describe the price pressures faced by American manufacturers as “intense” and blamed them “largely” on “higher raw material and metal prices stemming from the ongoing effects of tariffs.”

Nonetheless, the October survey also reported that “Driving the latest development in the health of the sector was a sharp increase in new business. The upturn in total new work reached a five-month high….” Additionally, “Greater production requirements and efforts to clear backlogs meanwhile led to a quicker monthly rise in hiring, the fastest for ten months.”

Pessimists can point to Markit’s observation that “firms registered a strong rise in buying activity amid reports of greater efforts to stockpile….” That’s evidence that manufacturers were drawing purchases forward in hopes of escaping the costs of future tariffs. At the same time, companies rarely build inventories unless they’re confident they can sell the stockpiled stuff further down the line. And indeed, according to Markit, “output expectations towards the coming 12 months improved, with firms suggesting that anticipations of further new order growth drove optimism.”

The only significant fly in this ointment concerned inflation. Markit.com’s Chris Williamson wrote that “In a clear sign that inflationary pressures are continuing to build, strong customer demand meant firms were often able to push cost increases through to selling prices. Average prices charged for goods leaving the factory gate consequently jumped to one of the greatest extents seen since mid-2011.”

So far, these price increases haven’t shown up in the official data (see here and here), but certainly they could. In fact, the entire sunny picture painted by these surveys, and the government figures, could darken all of a sudden, and tariffs might be to blame. But for the time being, nothing of the kind has happened. So when you see news reports or other statement to the contrary, predicting a future of trade war-produced future of gloom and doom, you can be surer than ever that the sources don’t believe that Facts Matter.

(What’s Left of) Our Economy: More Dubious Manufacturing Figures – from the Regional Feds

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data, inflation-adjusted growth, Institute for Supply Management, ISM, manufacturing, Philadelphia Federal Reserve, statistics, survivorship bias, {What's Left of) Our Economy

I hope that RealityChek regulars remember my posts debunking the idea that a widely followed private sector gauge of manufacturing’s health has much to do with manufacturing’s health. As I explained, the Institute for Supply Management’s (ISM) monthly surveys of American industry suffer badly from “survivorship bias.”

In other words, they may accurately report on the performance of the nation’s manufacturing base at that moment. But because they only question companies still in existence in a given month, they provide no information on how that base has changed over time, and especially on the vital question of whether the base has shrunk or grown. As a result, I was able to show that in recent decades, the ISM’s findings that domestic manufacturing is in “expansion” mode have usually – and increasingly – clashed with the (more comprehensive) government data.

At the same time, the ISM is far from the only survey-based report on manufacturing that’s closely followed by students of the economy and of industry – including investors. Many of the Federal Reserve’s regional banks analyze manufacturing in their geographic districts in the same way, and one such series that often makes headlines comes from the Philadelphia Federal Reserve. I just looked over its latest release – from this morning – and it was so completely weird that I checked to see whether its findings have matched up or not with government statistics on manufacturing’s growth in the area it covers. And guess what? Its results could well be as off base as the ISM’s.

What set me off was the Philly Fed’s finding that manufacturing in its district – which includes the eastern three-fourths of Pennsylvania (pretty much everything up to Pittsburgh), southern New Jersey, and Delaware – had moved back into expansion mode in July. Nothing strange per se about that. What was utterly bizarre was the contention that this improvement took place even though new orders for this same manufacturing complex plunged deep into contraction territory, and the employment indicators performed almost as badly.

These aren’t the only measures tracked by Philly Fed economists (and their counterparts at other regional Fed banks), and much more positive readings for other indicators pushed the overall headline figure – which is a composite of all the data – into the black for July. But let’s leave aside whatever narrow technical issues this methodology raises and grant the Philly Fed’s view that such a mix represents “expansion” or “growth.” Let’s also leave aside the reliance of the ISM and Philly Fed and the like on manufacturers’ judgments on how their companies are performing – rather than on their actual performance.

That still leaves us with the question of how well this definition of expansion or growth tracks with U.S. government data on the actual production achieved by manufacturing in the district over time. These strike me at least as better measures since they focus (however imperfectly) on what’s measurably come out of a factory. And of course, without adequate output, higher profile gauges of manufacturing’s health, like employment, can’t possibly be expected to be satisfactory (Unless you’re OK with productivity stagnating – which seems to be the case recently.)

There are no output numbers for the Philly Fed’s district as such. But you can get a pretty good idea of the situation by looking up the manufacturing production statistics for the major towns and cities it contains, which are kept by the U.S. Commerce Department. At this level of specificity, such data only go up to 2014. But the contrast between them during the current economic recovery (which began in 2009), and the Philly Fed headlines over the 2009-20014 period, is striking.

Here’s a chart from the Philly Fed that shows those headlines:

As you can see, the brown “current activity” line doesn’t indicate terrific performance. But it stayed over zero (i.e., in expansion) for most of the relevant five years.

The Commerce Department keeps statistics on manufacturing production pre- and post-inflation for 18 of the “metropolitan areas” in the Philly Fed district. I looked at the former, since it yields the best sense of volumes, and therefore of the level of activity. And these figures show that manufacturing production rose in nine of them. Score one for the Philly Fed? If you’re generous.

But there are still two big problems. First, two of those increases, in tiny Gettysburg and Bloomsburg-Berwick, were minimal – i.e., much less than one half of one percent. In bigger Lancaster, manufacturing production expanded by a total of 2.10 percent in real terms. Harrisburg-Carlisle, in the middle, size-wise, between those two areas, fared better, with 3.95 percent after-inflation manufacturing growth. But these increases look pretty paltry over a five-year stretch.

By far the best performance in the Philly Fed’s district was turned in by the Trenton, New Jersey area, where constant dollar manufacturing output soared by more than 54 percent between 2009 and 2014. But its manufacturing sector is still peanuts, relatively speaking. Moreover, the real manufacturing declines that show up in the Commerce data were much bigger on average than the increases.

The second big problem is that there’s no adequate data – either pre- or post-inflation – for the Philadelphia-Camden (New Jersey)-Wilmington (Delaware) metropolitan area, which is by far the biggest in the Philly Fed district. Nonetheless, the few numbers that are provided suggest that its manufacturing sector has fallen on hard times. Specifically, between 2008 and 2012 (the only post-2005 numbers available), its manufacturing production shrank by 18.63 percent adjusting for inflation.

So it seems fair to conclude that, if you’re looking for a reasonably accurate portrait of those domestic American manufacturers who are still standing after decades of offshoring-happy trade policies, other officially created challenges, the economy’s inevitable ups and downs, and frequently changing product markets and technologies, by all means rely on the monthly ISM and the regional Fed surveys. If you’re interested in knowing about manufacturing recently aside from these survivors – including about whether their ranks have grown or shrunk – you’ll need to look someplace else.

(What’s Left of) Our Economy: No, America Doesn’t Have a Manufacturing Demand Problem

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Census Bureau, exports, Financial Times, gross output, Im-Politic, imports, Institute for Supply Management, ISM, manufacturing, manufacturing trade deficit, Trade

Because the Financial Times is one of the world’s truly great newspapers (no, it’s not a long list), I was surprised to see its latest coverage of U.S. manufacturing data make a fundamental mistake. The paper’s report on yesterday’s December figures from the Institute for Supply Management (ISM) confuse the demand for manufactured goods with the production of manufactured goods. As a result, readers got an off-base description of the state of American manufacturing and its main challenges, and an equally erroneous picture of how these challenges can be overcome.

As I’ve written repeatedly, surveys like those conducted by the ISM are deeply flawed measures of manufacturing’s health to begin with. The main problem: their “survivorship bias,” which means that they only provide readings on the well-being of companies remaining in the sector at a given time. They say nothing about whether the industry itself is growing or shrinking.

But the Financial Times‘ article was comparably misleading when it claimed that the poor ISM December numbers showed that U.S. manufacturing’s problem nowadays is weakening demand for its products. Where recent months are concerned, that may be partly true. And certainly, many of the biggest foreign economies to which American manufactures sell have seen their own economic growth remain sluggish or slow further.

The ISM, however, also reported that America’s manufacturing imports have fallen on a monthly basis for three straight months. We’ll need to wait until the Census Bureau’s December U.S. trade figures are released (early next month) to know if that’s really true or not. (Census’ methodology is not affected by survivorship bias, and in fact its latest data show that America’s manufacturing imports rose between August and September, and between September and October.)

But what’s unmistakably true over the longer, and more meaningful, run is that whatever total slackening there has been in overall U.S. demand for manufactures, the sector’s main main headwind comes from elsewhere – specifically, abroad. In fact, through the first ten months of this year, although manufactures exports were down by 6.10 percent over 2014 levels, imports were up by 1.52 percent. In other words, the biggest demand problem facing domestic industry is that too much of the demand for this sector’s output in America – its biggest market by far- is being supplied from abroad. And it’s a problem that’s far from new.

The inadequacy of demand for domestically produced manufactured goods is evident from the ongoing surge in the U.S. manufacturing trade deficit – which keeps setting new annual and monthly records. But this particular demand problem is also clear from different figures that compare the growth of America’s manufacturing production versus the growth of the country’s market for manufactured goods – i.e., its purchases of such goods from all sources, at home and abroad.

The U.S. government’s statistical agencies don’t make displaying his comparison inordinately easy. But a reasonably accurate and up to date picture can be created by combining separately compiled figures – on the gross output of manufacturers located in America, and on the nation’s foreign trade. The U.S. market for manufactures consists of domestic output plus imports (which are, after all, consumed domestically) minus exports (which are consumed abroad).

For these purposes, the gross output data is more appropriate than the value-added data, since they reflect the production of all the manufactured inputs used in final products, rather than seek to avoid “double counting” both these inputs and the final products that contain them. The more comprehensive measure allows a more valid comparison with the export and import figures, which count inputs and final products separately, too.

Measured by gross output, American manufacturing production grew by 38.06 percent (before inflation) between the start of the current weak recovery in the second quarter of 2009 and the second quarter of 2015 (the latest available figures). That’s actually faster than the growth of total U.S. gross output during this period (28.59 percent). But the American manufacturing market – the demand for manufactured products – grew by 44.41 percent.

Moreover, most of this manufacturing gross output growth took place during the early part of the recovery, when the sector was snapping back from a near-death recessionary experience. Between 2009 and 2011, this production expanded by 24.89 percent in current dollars. From then until 2014 (the last full-year numbers available), this rate slowed to 10.68 percent, and 2015 will undoubtedly come in even worse.

To be sure, there’s been a bigger percentage slowdown in manufacturing import growth between 2009 and 2014 – 38.95 percent between 2009 and 2011 versus 11.94 percent since. But in addition to the absolute numbers being much bigger, the slowdown in export growth has been even greater: 39.31 percent to 10.21 percent.

Obviously, the faster the American economy grows, the faster its demand for manufactures will increase, and more production will result. But to achieve the industrial rebound so many U.S. leaders – including President Obama – have identified as necessary – much more will be needed. And given the persistently wide gap between American manufacturing demand and American manufacturing production, a thoroughgoing trade policy overhaul must be part of the mix.

(What’s Left of) Our Economy: New Reasons to Ignore Those Manufacturing Surveys

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consolidation, emerging markets, Federal Reserve, industrial production index, Industry Week, innovation, Institute for Supply Management, investment, ISM, manufacturing, Markit.com, mergers and acquisitions, Michael Collins, monopoly, offshoring, oligopoly, survivorship bias, Trade, {What's Left of) Our Economy

The newest editions of the two big private sector American manufacturing gauges – from Markit.com and the Institute for Supply Management (ISM) came out this morning, which should be a complete non-event given all the data I’ve presented on what a terrible job the ISM in particular does at tracking industry’s real health. (I haven’t closely analyzed Markit’s results, but since they roughly match the ISM’s, they seem about as bad.)

Of course, the Markit and ISM releases are in fact big deals to policy-makers, economists, and investors, so let’s try to turn a sow’s ear into a silk purse and show how the big structural weakness of these surveys can be used as a window into a big reason for domestic manufacturing’s ongoing collective troubles. That weakness, as loyal RealityChek readers know, is survivorship bias. And recently, an important new explanation for this bias, for its resulting distortions, and for manufacturing’s continuing struggles despite all the renaissance claims, has come to light.  

A quick refresher on survivorship bias: Unlike the Federal Reserve’s index of industrial production, the Markit and ISM surveys don’t try to measure how the American manufacturing sector as a whole has grown or shrunk. (Both companies look at other measures of manufacturing performance, too, and this discussion applies to them as well.) Instead, they choose a sample of manufacturing companies and ask key executives to assess their firms’ circumstances. If Markit and ISM asked these businessmen for their actual growth or other figures, for example, this wouldn’t be a big problem. But since they ask instead whether they’ve been growing (or contracting) at all, it’s a huge problem.

With the former methodology, it would be at least reasonable to extrapolate the sample data and draw conclusions about the entire domestic manufacturing complex. But the technique used by these two companies simply tells us how that sample (which is also much smaller than the Fed’s) has been faring in its own judgment. And because so many U.S.-based manufacturing firms have fallen by the wayside in recent decades, the Markit and ISM surveys wind up reporting only on the remaining companies – the survivors.

Individual companies, of course, can often prosper even as their overall sector isn’t (grabbing a larger share of stagnant or even shrinking pies). But that’s exactly why the Markit and ISM results have lost whatever ability they may have once had to describe domestic manufacturing’s overall health when overall industry was much larger.

At the same time, it shouldn’t be forgotten that because of greater efficiencies, a national manufacturing sector with fewer companies can still keep generating more production and employment. That’s why I’m always hesitant to use as evidence of U.S.-based industry’s troubles data on the (significantly) declining number of American manufacturing “establishments” over time. There’s no doubt that these figures reflect many company failures, and resulting factory shutdowns. But there’s also no doubt that they reflect lots of that aforementioned efficiency-enhancing consolidation – and these statistics don’t contain any breakdowns.

Recently, though, some new data have emerged that reveal another angle of the survivorship bias issue – the surge of mergers and acquisitions in manufacturing. These transactions are fundamentally different from the two forms of consolidation described above. Rather than stemming from individual companies deciding that they can do better with, say, one factory rather than two, or from individual companies prospering because rivals have gone bust, this form of consolidation stems from companies acquiring one another.

An important June post from IndustryWeek makes clear how dramatic this increase has been, especially since the early 1980s. As a result, in 200 manufacturing sectors monitored by the Census Bureau, 16 percent were characterized by their four largest companies accounting for at least half the value of shipments. By 2007 (the latest statistics available), this share had jumped to 37 percent.

The post’s author, consultant Michael Collins, notes that “Under [such] oligopoly and monopoly conditions, investment slows down. Because competition is weaker, corporations are better able to raise prices and profits without investing in new technologies and products—and declining investment can lead to declining innovation and economic stagnation.”

He doesn’t say this explicitly, but it shouldn’t be overly difficult to see how such consolidation can undermine production as well. This could be especially important given the huge share of domestic manufacturing that’s engaged in the production of parts, components, and other industrial inputs. They’re the source of considerable innovation in industry, and if manufacturers overall become less interested in better products and processes, then demand for their output is bound to suffer.

Collins also hints at another way that consolidation could depress output – by using oligopoly and monopoly power to reduce wages and increase prices for American consumers. In recent decades, the argument could reasonably be made that new demand in emerging market countries like China, Mexico, and Brazil would compensate – and then some – for lower consumer and industrial purchases in the United States.

But nowadays it should be obvious that this promise has not been realized and remains a distant prospect. Three big reasons: Emerging market growth has slowed dramatically and even shifted into reverse in some instances; the incomes of their consumers have remained so low; and they have made dramatic progress in supplying their own industrial innovation needs themselves. And largely because these emerging markets (enabled by offshoring-friendly investments and trade policies) sapped the growth potential of high income countries like the United States without adequately replacing it, the world has been stuck in low-growth mode ever since recovery from the last recession began – six long years ago.

It’s completely unreasonable to expect Markit or ISM to shed much light on these wide-ranging developments in their monthly reports. But by the same token, it should be clearer than ever that what they don’t show about domestic manufacturing is far more important than what they claim to reveal.

Following Up: Trump & Sanders, Obama’s Katrina Moment, Manufacturing Fakeonomics – & an Overdue Thank You

Tags

2016 elections, Bernie Sanders, climate change, cyber-security, Democratic Party, Donald Trump, Following Up, hacking, Hillary Clinton, Immigration, Institute for Supply Management, ISM, Katherine Archuleta, manufacturing, Obama, Office of Personnel Management, Open Borders, OPM, Populism

For some reason, Hillary Clinton’s campaign website isn’t technologically up to speed enough to have posted a transcript of the “economic vision” speech she delivered this morning. So instead of analyzing it, I’ll try something a little different on RealityChek – a “Following Up” offering covering multiple subjects.

The first starts off with an apology. In last week’s piece on how Donald Trump could (but probably won’t) help generate long-term change in American politics, I wrote that his president candidacy nonetheless seemed more likely candidate than Democrat-Socialist Bernie Sanders’ to foster badly needed ideological realignment. My stated reason was that the big obstacle to Trump efforts along these lines is his personality, whereas the big obstacle to the Vermont Senator playing such a role is his ideology.

But then when I discussed in detail Sanders’ prospects as a change agent, I wrote that “he seems to be a more plausible candidate to help create an enduring populist alternative to the two major parties.” And my stated reasons included the ideological flexibility he’s displayed on issues like gun control! So what gives? In a word, I messed up. So let me try to clarify.

I still believe that Trump’s “superstar CEO” nature and consequent unwillingness to take advice from anything but Yes-men will prevent him from trying to turn his presidential campaign into a lasting movement once the former runs its course. Nor do I see any reason to change my mind despite some new comments from him suggesting the possibility of running as an independent in the fall campaign and continuing his political work beyond the current election cycle.

I also remain impressed with Sanders’ pragmatism and willingness to reach across the aisle for both legislative support and also counsel. But I don’t believe that he’ll display the same traits on the immigration and climate change issues I focused on. Re the former, he seems to be too personally invested to moderate much. Re the latter, I don’t believe he’ll want to buck the overwhelming tide I see in the Democratic party for ever more Open Borders.

Hence my conclusion – that a Trump personality change relevant to creating a new, bipartisan American populism is a better bet than a similar Sanders ideological change. But that doesn’t mean I view such a Trump transformation as even close to likely. And I do apologize for the confusion I might have created.

Second, my post on how unqualified Katherine Archuleta was to head the mega-hacked federal Office of Personnel Management left out the strongest evidence for that argument: She wasn’t only a veteran Democratic political operative (with zero background in technology). She was also a senior official in President Obama’s 2012 reelection campaign. In other words, in an age of mounting cyber-threats, the president treated the government’s main personnel agency like a cushy ambassadorship to some Caribbean island mini-state. And he still hasn’t caught much heck from the Mainstream Media for this dangerously cavalier decision.

Third, one of my longtime bugaboos is how seriously economic journalists and even economists themselves take the monthly reports on domestic American manufacturing’s health by the Institute for Supply Management (ISM). In particular, I’ve shown that neither ISM’s headline readings, nor its sub-readings on production and manufacturing orders, correlate well at all with the more reliable output and orders data put out by the federal government.

Imagine, therefore, how pleased I was to discover that, a few years ago, a Commerce Department economist came to pretty much the same conclusions. According to this study, the ISM surveys don’t even do an especially good job at what’s supposed to be their strong suit – not precisely gauging the state of manufacturing in any given month, but presenting evidence of approaching changes in its fortunes and the broader business cycle. As author Daniel Bachman demonstrated exhaustively, “While more information about the state of the economy is always better, analysts of the business cycle should realize that the ISM surveys do not supercede or fully anticipate more comprehensive official data.”

Finally, one house-keeping point: an overdue thank you to the growing ranks of RealityChek followers. Your interest is greatly appreciated – and I hope you’ll spread the word!

(What’s Left of) Our Economy: More Manufacturing Fairytales from the ISM

Tags

Federal Reserve, industrial production index, Institute for Supply Management, ISM, manufacturing, {What's Left of) Our Economy

I was going to write about Greece this morning, but a closely watched gauge of American manufacturing has just turned in such a totally weird reading (again), and is prompting such excitement (again) that the cold water bucket needs to come out now.

The gauge is the Institute for Supply Management’s (ISM) monthly Report on (manufacturing) Business, which looks at many different measures of manufacturing performance. I’ve written previously that both its overall headline reading and its sub-gauge of output have no relationship to the Federal Reserve’s industrial production index – which is much broader and otherwise more methodologically sound. So I’m not at all surprised that today’s ISM production figures show that this gap is still intact, along with the ISM’s pattern of reporting a much rosier picture than the Fed.

The new ISM production figure (for June) was 54.0, which is solidly in “solid” territory. (All ISM data over the 50 level indicate expansion.) We won’t get the Fed’s June figure for about two weeks (one reason economists and investors tend to pay more attention to the ISM). But in May, according to the Fed, inflation-adjusted manufacturing output shrank from April’s levels by 0.21 percent. By contrast, the ISM May production reading of 54.5 pointed to even “solid-er” growth.

Nor was May an aberration. Here are the Fed’s monthly real manufacturing output change figures for this year, with the ISM’s production number for that month in parentheses:

January -0.66 percent (56.5)

February -0.18 percent (53.7)

March +0.31 percent (53.8)

April +0.13 percent (56.0)

Sometimes, ISM defenders argue that it does a better job tracking changes in the direction of manufacturing’s performance rather than revealing the sector’s status at any given point in time. But these numbers, as well as earlier historical data I’ve analyzed, show nothing of the kind. And my explanation remains intact: The ISM’s methodology suffers from “survivorship bias” – i.e., it (tries to) measure the performance of the existing manufacturing base in any given month without accounting for how the size of the base may have changed over time.  The Fed tries to measure actual production, adjusted for price.

Therefore, the lessons are clear for anyone who’s following manufacturing. If you want something close to the real deal, look to the Fed’s industrial production data. If a shot of hopium is more your style, nothing beats the ISM.

(What’s Left of) Our Economy: The Fed Reports a Manufacturing Renaissance — at Least for November

Tags

automotive, durable goods, Federal Reserve, industrial production index, Institute for Supply Management, ISM, manufacturing, manufacturing renaissance, nondurable goods, PMI, regional Feds, {What's Left of) Our Economy

The latest industrial production figures from the Federal Reserve showed that real U.S. manufacturing output rebounded strongly in November, powered by a surge of automotive production but also by broader-based gains.  In addition, upward revisions erased the slump previously recorded for the sector starting in late summer.  According to the new Fed report, inflation-adjusted nondurable goods production continued its recent pattern of outpacing durable goods advances, and the new results kept contrasting with those of surveys issued by the private sector, regional Fed banks — and the Fed itself.

Here are the manufacturing highlights of the Federal Reserve’s new release on November industrial production:

>This morning’s Fed data reported a preliminary 1.15 percent monthly surge in inflation-adjusted manufacturing output – the biggest monthly gain since February’s 1.34 percent snap back – and revisions erased what had been industry’s worst three-month real production performance since 2011.

>November’s increase was led by a 5.13 percent monthly automotive rebound that broke that sector’s worst growth performance since the peak of the financial crisis. Within automotive, after-inflation growth was spearheaded by a 9.32 percent jump in vehicle production, the best monthly rise since July’s 14.45 percent spurt. Parts production also rose for the first time in three months – by a healthy 1.28 percent.

>Even stripping out the automotive sector, real manufacturing output advanced by 0.85 percent in real terms in November – more than October’s 0.49 percent and the best performance by this indicator since March.

>Strong revisions brightened the manufacturing picture, too. October’s real monthly growth was revised from a weak 0.19 percent to a solid 0.45 percent. September’s figure was revised up from 0.21 percent to 0.37 percent. (It was initially pegged at 0.47 percent.) August’s 0.42 percent real production drop – the first monthly decrease since January – was revised to -0.37 percent. (It was initially pegged at -0.46 percent.)

>November’s strong inflation-adjusted output pushed manufacturing’s year-on-year real growth to 5.05 percent – much stronger than the comparable 3.04 percent 2012-2013 figure and the sector’s best since July’s 5.26 percent.

>Continuing a recent pattern, despite the automotive sector’s outsized growth, monthly expansion in the real nondurable goods sector (1.16 percent) outpaced growth in durable goods in November (1.14 percent).

>Nonetheless, durable goods production after inflation is still increasing much faster year-on-year (5.74 percent) than nondurable goods output (4.35 percent), though the gap between the two continues to narrow.

>On an inflation-adjusted basis, U.S. manufacturing output is now 3.10 percent higher than its pre-recession high. Real durable goods production has grown by 10.46 percent since then, but the non-durables sector is still 5.38 percent smaller than at its pre-recession zenith, which was hit in July, 2007.

>The November manufacturing output figures also show that these Federal Reserve data continue to diverge in important ways from the results of widely followed surveys conducted by the private sector and regional Federal Reserve banks.

>For example, the November manufacturing production figures from the Institute for Supply Management showed a slight slowdown in real manufacturing output, not the acceleration reported this morning by the Federal Reserve.

>Markit.com’s November Purchasing Managers’ Index reported “the weakest pace of [production] expansion since January.”

>The new Federal Reserve manufacturing production numbers do match up well with the monthly November output boom reported by the Philadelphia Federal Reserve Bank. But the other regional Fed manufacturing results for November were more subdued.

>Also interesting: No major pick up in November manufacturing output was reported in the Federal Reserve’s own Beige Book, either. Its assessment simply observed that “Manufacturing activity generally advanced during the reporting period.”

 

(What’s Left of) Our Economy: More Problematic Data from the ISM

Tags

Census Bureau, ISM, manufacturing, new orders, statistics, survivorship bias, {What's Left of) Our Economy

To hear it from The Wall Street Journal, the Institute for Supply Management’s (ISM) monthly reports on American manufacturing activity have been at “rarified” levels lately; therefore, domestic industry must be thriving. Regular RealityChek readers know better. But with the Supply Managers’ next set of results coming out this morning, and with their reports still often taken as gospel on manufacturing’s health, I thought I’d look into the accuracy of yet another one of their sub-indices – the reading on new orders in the sector.

The orders data are crucial both because they often signal the future direction of production and employment, and because, as with other ISM sub-indices, these results can be measured against official U.S. government data. And as with my research on the ISM’s headline figure, and its job sub-index, the Supply Managers’ new orders sub-index appears to suffer significantly from survivorship bias.

Its methodology only measures the activity of manufacturing facilities that exist at a given moment in time. The ISM reports are completely incapable of measuring how the entire sector’s output or employment or any other indicator has changed over any significant stretch of time, because they don’t take into account increases or decreases in the total number of manufacturing facilities.

The discrepancy between the survivorship-distorted ISM new orders figures and the Census Bureau’s efforts to measure actual new orders has been apparent since the beginning of this year. The harsh winter plainly depressed all manufacturing activity in the nation, and Census data shows that new orders sank from December to January by a very steep 1.64 percent. The ISM showed a dropoff, too, but its results showed that orders still expanded modestly in absolute terms.

February saw a big order bounceback, to the tune of 1.68 percent. But the ISM only reported a slight acceleration in such new business. According to the Census Bureau, new manufacturing orders grew robustly in March, too – by 1.47 percent. According to the ISM, however, March’s order growth rate increased only marginally.

Manufacturing’s health normalized as spring continued, but that trend was hard to glean from the spring ISM surveys. Census’ data showed that new orders expansion roughly halved in April, but the ISM new orders index stayed unchanged. In May, Census reported an order decrease of 0.56 percent, but the ISM reported faster growth – from the 55.1 level to 56.9. (ISM readings over 50 indicate expansion.) Census figures showed another strong (1.54 percent) rebound in June, but the ISM index rose only modestly, to 58.9.

The Census and ISM figures matched up best in July. The former reported a 10.48 percent jump in new manufacturing orders, and the latter showed that they accelerated from a good 58.9 reading to an excellent 63.4. But whereas Census reported a 10.03 percent nosedive in orders in August, ISM showed even faster expansion – from 63.4 to 66.7. And in September, the two data sets were completely at odds again, with Census reporting a monthly 0.55 percent decline in new orders but ISM showing new business still in strong (60) expansion territory.

Moreover, the ISM’s results look even stranger when some recent full year results are examined. So far this year, for example, the ISM new orders index is averaging 58.02 – indicating healthy growth. And cumulatively, new orders are up 2.09 percent during this period. But in 2013, the ISM new orders average was just a little lower – 57.15. Yet new orders growth for the full year – 0.62 percent – was less than a third of the nine-month 2014 figure.

More unusual still: 2010 was another year in which ISM new orders averaged around 58 each month – in this case, 58.53. But new manufacturing orders that year jumped by 16.07 percent – nearly eight times as much as in 2014 so far and more than 25 times the increase in 2013.

It can legitimately be argued that 2009-10 was an unusual year – manufacturing’s first recovery year after an historic downturn during the Great Recession. Yet 2005 was entirely normal by recent standards for manufacturing. The ISM new orders readings averaged 57.48 per month – just below 2010’s level and just about that of 2013. Census’ new orders growth in 2005 was just below 2010’s, too – at 13.08 percent. But that’s also much higher than the 2014 figure so far – let alone 2013’s negligible increase.

The ISM reports arguably are useful for investors and others who are interested in the performance of and outlook for America’s existing manufacturing base – although the monthly discrepancies between the survey and government data reported above reveal the need for caution. But those interested in assessing manufacturing’s true health, role in generating growth and jobs, and prospects for leading the production-led recovery needed by the nation, should look elsewhere for information.

(What’s Left of) Our Economy: Whose Manufacturing Data Should You Trust?

Tags

Bureau of Labor Statistics, Federal Reserve, ISM, Jobs, manufacturing, production, statistics, survivorship bias, {What's Left of) Our Economy

Back in February, I threw cold water all over the idea that the Institute for Supply Management’s closely watched monthly surveys of U.S. manufacturing are worth closely watching. Today the ISM’s latest report (for October) came out, so it’s a good occasion to see if the organization’s performance has gotten any better.

The short answer is “No.” But let’s refine the question in two ways. First, since it’s not reasonable to assume prima facie that government manufacturing data is always or usually the reality check, let’s change the question to “How well do the ISM results match up with Washington’s official data?” Second, rather than simply measure the ISM’s headline figure with the Federal Reserve’s statistics on manufacturing production, let’s compare the ISM’s specific output figure with those Fed output figures, and the ISM’s employment numbers with their counterparts from the Bureau of Labor Statistics.

Unfortunately, however, the ISM’s more specific gauges of manufacturing’s health stack up just as badly with federal government output and payrolls numbers as the headline – which incorporates many measures – stacks up with Washington’s production numbers.

My Marketwatch.com article looked at the data all the way back to 1993, but to get this post up sooner rather than later, I’m restricting my analysis to the current calendar year. Still, the results should worry anyone concerned with domestic manufacturing’s future – which should include everyone concerned with the U.S. economy’s future.

The gap between ISM data and U.S. government data is especially wide for production, and the problem began at the very beginning of the year.

Most everyone now agrees that the last harsh winter played some role in depressing overall economic activity in America, including in the manufacturing sector. The Federal Reserve production figures conform with this assessment, showing a 1.03 percent drop in inflation-adjusted manufacturing output between December and January. But the ISM January output number showed solid expansion that month, with a 54.8 reading. (Any ISM number above 50 indicates expansion, a below-50 reading indicates contraction.)

Most everyone also agrees that, once the worst of winter was over, overall economic activity, including in manufacturing, began recovering. Again, the Fed figures compare well with this assessment, showing a sharp 1.34 percent monthly growth rate for February. But the ISM output figure reported a significant manufacturing production drop – with a 48.2 result.

The divergence continued in March, though not so dramatically. The Fed figures showed manufacturing’s monthly real growth remained strong, but the expansion slowed to 0.89 percent. But the ISM showed a huge bounce-back from contraction to a 55.9 reading.

In April, May, June, and July both gauges reported roughly comparable results, both in the direction of the basic trend and in the magnitude of change. But problems reemerged in August. According the Fed, after-inflation manufacturing production shrank that month for the first time since January – by 0.46 percent. But according to the ISM, manufacturing output clocked in at 64.5 – its best monthly reading of the year.

In September, the Fed said manufacturing production recovered, growing by 0.47 percent in real terms. (This figure is still preliminary and will be revised.) The ISM reading improved as well – but only to 64.6. We won’t get the October Fed figure (along with that September revision) until November 17. For the record, the ISM manufacturing output figure released this morning was 64.8 – yet another 2014 record.

The ISM employment readings correlate better with the Bureau of Labor Statistics data on manufacturing job gain and loss, but questions still arise. And firm conclusions are a little harder to draw because, at least according to the BLS, the actual job changes month to month have been so small lately. But you be the judge.

In January and February, the ISM payrolls numbers were identical – 52.3 results that indicate so-so growth. The BLS showed that manufacturing employment in those months increased by 9,000 and 20,000, respectively – a strong acceleration in percentage terms but not in absolute terms.

The March and April comparisons between the two were good, but weakened some in May and June. For both months, the ISM reading was 52.8 – again, in the so-so-growth neighborhood. But the BLS figures showed quickening growth – from 15,000 to 21,000. More encouragingly, the BLS’ absolute job gain levels correlated decently with the absolute levels of the ISM labor indicator.

July’s match-up wasn’t nearly as good. The ISM payrolls indicator jumped all the way from 52.8 to 58.2. The BLS July job gain rate increased, too – but only from 21,000 to 24,000.

The August and September BLS figures are still preliminary, but so far, they differ significantly from the ISM results. For August, the ISM jobs figure fell, but only from 58.2 to a still strongly expansionary 58.1. But BLS claims that 4,000 manufacturing jobs were actually lost that month. For September, ISM reported somewhat weaker manufacturing job growth, as its reading dropped to 54.6. Yet the BLS reported that August’s 4,000 job loss had turned into a 4,000 job gain in September.

I still prefer the government data for several reasons. Mainly, they try to measure actual performance rather than reports of perceptions. And largely as a result, they’re not so distorted by the survivorship bias I’ve discussed in previous posts. But there’s no doubt that the above numbers make at least one conclusion clearer than ever: Over any serious length of time, you can reasonably trust either the federal government’s manufacturing data or the ISM’s. But you can’t trust both.

(What’s Left of) Our Economy: Why the ISM Manufacturing Report Should be a Non-event

Tags

Federal Reserve, ISM, manufacturing, survivorship bias, {What's Left of) Our Economy

In a few minutes, analysts of America’s manufacturing sector and its economy are going to start pouring over the newest monthly gauge of U.S. industry released by the Institute for Supply Management (ISM). And literally, with each passing month, the evidence keeps mounting that it’s a massive waste of time.

Recently, I’ve showed that correlations between ISM’s headline reading on American manufacturing’s health historically has had little to do with the sector’s actual growth rate, as measured by the Federal Reserve’s industrial production index. I’ve also explained that surveys like the ISM’s inevitably suffer from survivorship bias – they may arguably say something useful about what exists of a sample at any given moment, but they’re unable to measure directly how the size of that sample has changed over time.

Of course, the ISM’s headline incorporates more than just manufacturing production. It also includes findings about indicators ranging from employment to new orders to prices paid and received to exports and imports. Nonetheless, when you look at the ISM’s readings on production specifically, it becomes clear that they stack up no better than the headline with the Fed’s figures on manufacturing’s inflation-adjusted growth and shrinkage.

Here’s the comparison for this year so far:

In January, the Fed reported a sharp, weather-related, 1.08 percent decline in manufacturing’s real output. But the ISM’s 54.8 production reading indicated expansion.

In February, the industrial production index revealed a strong 1.34 percent rebound in manufacturing production. The ISM’s production reading fell all the way to 48.2 – contraction territory

In March, according to the Fed, the growth of inflation-adjusted manufacturing output slowed – to 0.89 percent. But the reading was still strong. The ISM’s production results matched up better with the Fed’s – changing from a contraction reading to a solid 55.9 growth number.

Over the next four months, the ISM and Fed figures were even more closely matched, with both revealing faster and slower production increases in the same months.

In August, however, the gap returned. According to the Fed, real manufacturing output fell by 0.40 percent that month. (The figure is preliminary, like all the Fed’ initial findings, and could be revised later this month.) But the ISM’s production figure not only grew, but it’s highest level for the year so far (64.5).

Since I have no crystal ball, I can’t say what today’s ISM report will show. What I can say with great confidence is that there’s little reason to care.