As usual, the latest two big monthly surveys of U.S. manufacturing activity – for August – came out within 15 minutes of each other this morning and, as usual of late, they contained almost nothing but excellent news for American industry and for anyone recognizing that its success is central to restoring genuine national prosperity.
As usual, also, however, both the manufacturing reports from Markit.com and from the Institute for Supply Management come with a big caveat. In line with what I explained in an August 21 post, both present results that are strongly influenced by what statisticians call “survivorship bias.” That is, they only serve up data based on the performance of manufacturing firms still in existence. Therefore, in principle, they shed only limited light on how current U.S. manufacturing performance indicators compare with past indicators.
Think of it this way: If the U.S. manufacturing sector had shrunk by this time to ten factories, and all of them reported strong growth in output and employment and new orders and everything else they measure, both the Markit and ISM reports would generate better results than a report ten years ago covering a domestic manufacturing sector containing 100 factories that reported slower growth and job gains etc.
Remembering survivorship bias is especially important when judging the ISM reports – which link their results to specific changes in overall U.S. economic growth. My research on this subject shows that in fact, the ISM results correlate poorly at best with changes in U.S. manufacturing output as measured by the Federal Reserve. The correlation with overall GDP is undoubtedly much worse.
So keep this record in mind when judging the new ISM report’s claim in particular that its strong headline figure of 59 (any result over 50 signals expansion), if it continued for an entire year, would correspond with economy-wide inflation-adjusted annual growth of 5.2 percent – a jaw-dropping rate. According to ISM, the slightly lower average monthly January-through-August PMI headline of 55 corresponds with real yearly U.S. growth of 3.9 percent – still awfully good, especially compared with a norm for the present recovery that’s about half as fast.
For what it’s worth, the rest of the August ISM report was at least as great as the headline. The Institute’s reading of new manufacturing orders hit 67.1 – its best level in more than ten years! This new order growth was so strong that it shifted the ISM order backlog number from contractionary territory in July back into expansion. Actual output reached 64.5, 3.3 percentage points higher than July’s very good 61.2. Manufacturing payroll growth slowed a tad from July, but at 58.1 still indicated solid growth. In all, 17 of 18 major industry groups tracked by the ISM grew in August, with textile mills the only exception.
The only worrisome aspect of the August ISM report concerned trade. According to the Institute, both the exports and imports of domestic manufacturers in August grew faster than in July, but imports appeared to be growing faster than exports, meaning (if there actually is a correlation with reality), an increase in the already astronomical U.S. overall and manufacturing trade deficits.
Markit’s monthly manufacturing survey is less closely followed than the ISM’s, but its August results looked similar. The headline reading of 57.9 was the highest it’s recorded for U.S. manufacturing since April, 2010 and words like “sharp,” “steep,” and “acceleration” marked its description of new orders and production trends. Manufacturing employment in August, moreover, according to Markit, grew at its fastest rate since March, 2013. And of special interest, Markit found that U.S. manufacturing export orders rose in August at their fastest pace in three years. (Import growth isn’t measured.)
In all, concluded a Markit economist, “The US manufacturing sector has gone from strength to strength this summer….” Of course, the survivorship bias issue suggests he should qualify this remark with a reference to “what’s left of domestic manufacturing.” For data with vital historic context – but still by no means perfect – we’ll have to wait for the Federal Reserve’s next monthly industrial production report, which comes out September 15.