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Official data showed manufacturing output rebounding in
November, albeit still on course to decline in the fourth
quarter.
The official data correspond closely with IHS Markit PMI
signals, and contrast with a steep decline indicated by ISM
data
Some of the confusion over varying US survey signals was lifted
after official data showed manufacturing output rebounding 1.1% in
November, confirming the picture presented by the IHS Markit's PMI
data. December flash PMI data meanwhile point to a further
stabilisation of production.
The manufacturing output index from the IHS Markit PMI survey
had risen to a ten-month high of 53.7 in November, indicating that
the goods-producing sector continued to gain growth momentum for a
fourth successive month after having slumped earlier in the
year.
The improvement in the IHS Markit index contrasted with
continued weakness in the ISM survey, where at 49.1 the November
production index remained at its third-lowest since May 2009,
albeit picking up from lower readings in September and October. The
resulting gap between the two surveys in recent months, in terms of
the weakness of the ISM index relative to the equivalent IHS Markit
index, has been the largest ever recorded.
To draw meaningful conclusions from the survey indices we use
regression analysis to compare the surveys against historical
official data produced by the Federal Reserve. From these
regressions we can derive comparable implied official growth rates
from the two surveys [*]. These regressions reveal that since 2008
the IHS Markit index has exhibited a closer fit with the official
data than the ISM has, the respective adjusted r-square values
being 0.79 and 0.69.
The regressions also indicate that the IHS Markit production
index is running at a level consistent with an average 0.3%
quarterly rate of decline in the fourth quarter while the ISM index
is consistent with a 1.7% rate of quarterly decline. By comparison,
the official data from the Fed so far in the fourth quarter are
running 0.4% behind the third quarter despite the November rebound,
which is clearly far closer to the IHS Markit signals than the
much-weaker ISM survey.
Looking in more detail at the latest official numbers, the 1.1%
rebound in production in November partly reflected the return to
work for striking GM workers after plant closures in October, which
in turn contributed to a 0.7% drop in manufacturing output in
October. However, even excluding autos, manufacturing output rose
0.3% in November, correlating well with the relatively robust IHS
Markit signals. Moreover, the
December flash PMI data from IHS Markit indicate that the
sector continued to show signs of stabilisation from the soft patch
seen earlier in the year, albeit losing a little momentum compared
to November.
Survey differences
To help explain why the surveys differ we need to look closer at
the methodologies:
Survey panel sizes are different: IHS Markit's survey panel is
larger than the ISM's stated panel size. IHS Markit surveys around
800 manufacturing companies (approximately double the size of the
ISM panel size) from which an 80% response rate is typically
received. However, unlike IHS Markit, ISM does not disclose actual
numbers of questionnaires received. As a general rule, a large
panel size produces more stable and accurate survey results,
meaning the data tend to be less volatile and 'noisy'.
The surveys also use different panel structures: ISM data are
based only on ISM members, and as such are likely to reflect
business conditions in larger companies, with small- and
medium-sized firms under-represented. In contrast, IHS Markit's
survey includes an appropriate mix of companies of all sizes (based
on official data showing the true composition of manufacturing
output each year).
Survey responses may relate to different markets: The
questionnaire that we have seen indicates that ISM does not
specifically ask respondents to confine their reporting to US
facilities/factories whereas IHS Markit specifies that all
responses must relate only to business conditions at US factories.
ISM data could therefore be more heavily influenced by global
conditions facing of US-owned companies than the IHS Markit data.
Note that global manufacturing growth outside of the US, as tracked
by IHS Markit's other PMI surveys, accelerated sharply in 2017, and
has since matched the pattern of growth shown by the ISM. More
recently, note that global-ex-US growth has slowed sharply to show
some of the weakest rates seen over the past ten years.
Put all of the above factors together and it becomes clearer as
to why the ISM data may have exaggerated US manufacturing in 2017
and 2018, and why it is now possibly overstating the weakness.
*Note that rather than compare the surveys with month-on-month
changes in official data, which show considerable volatility, we
compare the surveys with a rolling three-month rate of change in
the official data (i.e. the change in output in the latest three
months compared to the prior three months). This has the advantage
of highlighting the growth trend in the official data while
avoiding (a) the volatility of the monthly data and (b) the induced
lag of annual growth rates.
For more information contact economics@ihsmarkit.com.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
