The Institute for Supply Management’s manufacturing index for April fell 2.4 points month on month to 54.8, a weaker than analyst expectations of a score of 56.1. A sharp decline in the sub-index for new orders was the principal cause of the decline in the overall index.
The ISM manufacturing index is based on surveys of 400 purchasing managers in 20 industries. The survey is a diffusion index calculated as a percent of responses. A value of 50 is neutral, while less than 50 is contracting and greater than 50 is expansionary,
Figure 1 shows the history of the ISM manufacturing index from 2003 to present. The index is solidly in the expansion region despite the slight setback in April. On a 3 month moving average basis the index posted a value 56.6, up 11.6%, 3 months year on year.
Table 1 breaks down the detail of the composite index and sub-indexes. Momentum was positive in every single category as was the three month moving average (3MMA) and the 12MMA. For the month, the new orders sub-index was disappointing, falling 10.9% to 57.5 in April. The employment sub-index also rolled back, off 11.7% this month to score a 52.0. The ISM employment index is consistent with a decline of 12,000 in manufacturing employment in April. Manufacturing employment rose by 11,000 in March and 26,000 in February.
The difference between new orders and inventories which is considered a proxy for future production strengthened from 15.5 to 6.5. This points toward improvement in factory production for the coming quarters. For the second consecutive month, 17 industries reported growth in production, compared with 14 in February and 10 in January. Moody’s economists think that the ISM manufacturing index has been somewhat inflated since the presidential election as a result of optimism on the part of those surveyed. Now some of that optimism is fading resulting in the lower index scores. This theory helps explain the difference between the soft and hard data. The soft numbers being more bullish than the hard data can support. Future data releases will confirm or negate this theory. Overall ISM manufacturing index has taken a couple of steps back over the past two months, however most indicators point to continued strengthening in in the months ahead.
At Gerdau we closely monitor the ISM manufacturing index since it is an excellent barometer of the present strength as well as a window on the likely short-run future of US manufacturing.