- In May the list of manufacturing surveys grew longer, as we saw the release of the first manufacturing PMI survey from Markit Economics.
- We continue to favour the ISM over the Markit PMI as a predictor of activity in the manufacturing sector due to the longer history of data. That said, using only data back to mid-2007 the predictive power of the PMI for production, employment and inventories is comparable to the ISM.
- If we adjust for the difference in weights, the Markit PMI has had a very strong correlation with the ISM over the past year. If this relation continues to hold, the flash PMI suggests a decline in the ISM to 53.5 on Friday. This is in line with our models suggesting a one-point decrease to 53.8.
- There is no doubt that the global industrial production cycle is turning softer and this is also starting to be felt in the US. That said, an ISM at 53 suggests manufacturing production growing at a 3.5% annual rate, which is still decent.
A Detailed Look At The Markit PMI
With the release of the first-ever Markit PMI in May, we obtain yet another source of insight into the state of the US manufacturing sector. With a sample almost twice the size of the ISM sample and a flash estimate released around a week prior to the ISM, it could become an interesting market mover going forward.
With historical data going back to mid-2007, compared to ISM data dating back to 1948, it is, however, not possible to track the performance of the Markit figure until we have some more data points. Based on the relatively short data sample we have, the ISM and the PMI do nevertheless seem to follow each other nicely, with a correlation of around 90%.
The Markit PMI composite is a weighted average of five sub-indices, the same as the ISM, but the weighting differs. The Markit attaches larger weight to the output and new orders sub-components but reduces it for inventories (stock of purchases) and delivery times (see table at the right). If we use the ISM weights on the Markit data (see the first chart below) it is clear that the two figures have been more or less in sync over the past year. This speaks in favour of using the flash PMI as a predictor of the ISM.
Predictive Power Of The Markit And ISM Sub-Indices
Using the different sub-components of the two manufacturing surveys, it is possible to construct simple regression models for relevant hard manufacturing data, such as manufacturing productions and core durable goods orders. By comparing the predictive power of the different sub-components over a similar sample period (mid-2007 to today), we find that the ISM and the Markit survey by and large contribute with the same amount of information.
What To Expect For Friday's ISM Release
On 24 May the first release of the Markit flash PMI showed a deterioration of economic conditions in the manufacturing sector, falling to 53.9 down from 56.0 - still remaining well within expansionary territory. Adjusting for the different weighing of the ISM and the PMI, this points to an ISM reading of 53.5 on Friday. This is in line with our prediction of a one-point drop in the ISM to 53.8, based on our model consisting of local PMI surveys and a wide range of economic and financial indicators. Even though the slowdown in global growth is starting to be felt in the US manufacturing sector, an ISM at 53 corresponds to manufacturing growth at 3.5% annually, which is still a decent growth rate.
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