Latest Manufacturing Headlines and the PMI

The New York Times published an article in the February 3rd 2014 New York Times:  Markets Sink as Manufactuirng Data Weighs on Investors.

Stocks on Wall Street slumped on Monday, with the S.&P. 500-stock index hitting its lowest level since October, after weaker-than-expected data on the American factory sector provided investors with the latest reason to book profits.

The United States manufacturing sector grew at a slower pace in January as new order growth plunged by the most in 33 years, while spending on construction projects barely rose in December.

The Wall Street Journal had a similar story as its front page headline.  

So... what is meant by "new order growth plunged by the most in 33 years?"  Where does this data come from and what does it mean?

A little websearch revealed that the source report is the Institute for Supply Management (ISM) Purchasing Manager's Index (PMI).  ISM was founded in 1915 and serves the purchasing and supply management professions.

About ISM:  Institute for Supply Management™ (ISM) is the first supply management institute in the world. ISM's mission is to lead the supply management profession through its standards of excellence, research, promotional activities, and education.

The PMI, per Investopedia, is a:

composite index of five "sub-indicators", which are extracted through surveys to more than 400 purchasing managers from around the country, chosen for their geographic and industry diversification benefits. The five sub-indexes are given a weighting, as follows:

• Production level (.25)
• New orders (from customers) (.30)
• Supplier deliveries - (are they coming faster or slower?) (.15)
• Inventories (.10)
• Employment level (.20)

The report is issued the first of each month adding the previous month to the report.  The report is highly regarded for the following reasons, as quoted again from Investopedia:

Although U.S. manufacturing is not the huge component of totalgross domestic product (GDP) that it once was, this industry is still where recessions tend to begin and end. For this reason, the PMI is very closely watched, setting the tone for the upcoming month and other indicator releases.

The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. If manufacturing is expanding, the general economy should be doing likewise. As such, it is considered a good indicator of future GDP levels. Many economists will adjust their GDP estimates after reading the PMI report. Another useful figure to remember is 42. An index level higher than 42%, over time, is considered the benchmark for economic (GDP) expansion. The different levels between 42 and 50 speak to the strength of that expansion. If the number falls below 42%, recession could be just around the corner. 

The report itself can be found at http://www.ism.ws/ISMReport/.  In looking at the report here is what it has to say about New Orders:

ISM's New Orders Index registered 51.2 percent in January, a significant decrease of 13.2 percentage points when compared to the December seasonally adjusted reading of 64.4 percent. This represents growth in new orders for the eighth consecutive month, but is also the largest decline in new orders in the last four years. A New Orders Index above 52.1 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

The eight industries reporting growth in new orders in January — listed in order — are: Primary Metals; Electrical Equipment, Appliances & Components; Machinery; Transportation Equipment; Plastics & Rubber Products; Computer & Electronic Products; Food, Beverage & Tobacco Products; and Chemical Products. The seven industries reporting a decrease in new orders during January — listed in order — are: Nonmetallic Mineral Products; Petroleum & Coal Products; Wood Products; Miscellaneous Manufacturing; Furniture & Related Products; Paper Products; and Fabricated Metal Products.  (The graphic below is also from the report.)

New Orders	% Better	% Same	% Worse	Net	Index
Jan 2014	27	54	19	+8	51.2
Dec 2013	34	52	14	+20	64.4
Nov 2013	36	46	18	+18	63.4
Oct 2013	29	54	17	+12	61.3

The ISM Report said the largest decline in the last four years not the last 33 years.  

This is something to keep an eye on.