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.