The ISM Reports on Business and the U.S. Economy Norbert J. Ore, CPSM, CPM, MA Chair, ISM Manufacturing Report on Business norjore@gmail.com
we ll be talking about... The history and development of the Indexes A short economics lesson Intro to ISM Reports on Business The January 3 Report Doing the Analysis The future
Institute for Supply Management ISM Manufacturing Report on Business is covered by national and international media after it is released on the first day of the month
History and Development Manufacturing ISM Report on Business since 1931 Supplier Deliveries index added in 1971 PMI developed in the early 1980s New Export Orders, and Imports Indexes added in 1980s Backlog of Orders Index added in 1993 Customers Inventories index added in 1997 The Non-Manufacturing ISM Report On Business was launched in 1998 including data beginning July 1997 The Report s concept and format has been adopted in 23 other countries resulting in the JP Morgan Chase Global PMI People s Republic of China adopted in 2006 4
U.S. GDP 5% 71% 21% 11% Government Spending Business Investment Consumer Spending Other Source: NIPA 2009 data 5
6.00 US GDP 1990-2010 GDP has to grow above 2 percent for Mfg to grow Five year average is 0.8 percent 4.00 2.00 +2.8 fcst +2.1 fcst 2009 2.6 percent with Q4 at +5 percent 0.00-2.00-4.00 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Sources: BEA, Wells Fargo 6
Manufacturing Growth Percent of Current Average Annual Average Average Average Productivity Nominal Percent Growth Rate Price index Growth Growth Real growth GDP Nominal Nom GDP Annual Rate in Rate in minus growth in in 1960 GDP since 1960 Growth REAL GDP Employment Employment (E+F) since 1960 since 1960 since 1960 (F-G) Agriculture 3.8 1.0 4.8 2.0 2.8-0.7 3.5 Manufacturing 23.3 12.0 5.5 2.0 3.5-0.1 3.6 Total Services 30.2 50.9 8.5 4.5 4.0 2.6 1.4 Total Economy 100.0 100.0 7.3 3.8 3.5 2.0 1.5
How the Economy Grows Interest Rates Consumer Borrowing Individual s real hourly earnings Consumers Spend Industrial Production Services Capital Spending Stock Market Corporate Profits Employment Adapted from Ahead of the Curve-thebook.com Joseph H. Ellis Individuals Hourly Earnings
www.ism.ws 9
U.S. Manufacturing Apparel Petroleum and Coal Products Electrical Equipment, Components Chemicals Primary Metals Machinery Paper Products Computer and Electronic Products Transportation Equipment Food, Beverage Plastic and Rubber Products Fabricated Metal Products Nonmetallic Mineral Products Printing Textiles Wood Products Furniture Miscellaneous Mfg
The Manufacturing ISM Report On Business A monthly survey of over 350 manufacturing purchasing executives Survey measures month over month change based on the responses to ten questions The PMI is calculated from five seasonally adjusted indexes The manufacturing report is released monthly on the first business day The non-manufacturing report is released monthly on the third business day
What is a diffusion index? Above 50% indicates growth Below 50% indicates contraction 50% is breakeven or no change
Manufacturing PMI - 61.4 Non-manufacturing NMI - 59.4* 75 70 65 60 55 50 45 40 35 30 PMI NMI *Non-Mfg for February is released on March 3
recognized leading indicator of the U.S. economy new orders index >50.2% = growing manufacturing orders contraction began in Dec 2007 and reached low of 23.1% in Dec 2008 12 of 18 industries saw increases in new orders 70 60 50 40 30 20 Manufacturing New Orders Index: 68.0
Manufacturing Production Index: 66.3 coincident indicator 70+% correlation with IP fell to 25.5% in Dec 08 cyclical peak of 66.6% in May 10 13 of 18 industries growing 70 60 50 40 30 20 Production
job losses started in Nov 07 and continued through Oct 09 lagging indicator and a shift +/- is an indicator that significant change in the business cycle is already underway 11 of 18 industries growing 70 65 60 55 50 45 40 35 30 25 Manufacturing Employment Index: 64.5 Employment
slower deliveries a sign of a growing economy Conference Board Leading Indicator provides insight to both timing and availability of manufacturer s deliveries index down from cycle high of 64.9 in Mar 10 and hit a cycle low at 44.4% in Mar 09 75 70 65 60 55 50 45 40 35 30 Manufacturing Supplier Deliveries Index 59.4 Supplier Deliveries
Manufacturing Inventories Index: 48.8 material and component inventories de-stocking cycle occurred in 08 09 re-stocking in 10 9 of 18 manufacturing industries increasing 60 55 50 45 40 35 30 Inventories
level of inventories in the forward supply chain too low is preferable favorite of the Fed indicates significant room for restocking cyclical high Dec 08 at 57.0 first signaled inventory build in Oct 06 70 65 60 55 50 45 40 35 30 Manufacturing Customers' Inventories Index: 40.0 Too High Too ` Customers' Inventories 19
bottomed at 23.0 in Dec 08 peaked at 61.0 in February 10 6 industries chronic problems Wood Products; Miscellaneous Products Printing Textiles Furniture Nonmetallic Mineral 70 60 50 40 30 20 Manufacturing Backlog of Orders Index: 59.0 Backlog of Orders
bottomed at 35.5 in Dec 08 February is new cyclical peak relation to value of the US$ 80% of respondent companies export 75 70 65 60 55 50 45 40 Manufacturing New Export Orders Index: 62.5 35 30 Exports 21
bottomed at 32.0 in Feb 09 cyclical peak 61.5 in Feb 07 65% of imports are US companies from overseas plants 80% of respondent companies import 70 65 60 55 50 45 40 Manufacturing Imports Index: 55.0 35 30 Imports 22
35 30 25 20 15 10 5 0-5 -10-15 -20 Manufacturing New Orders Inventories = +19.2-16.4 - Dec 08 +28.1- Aug 09 +21.8 - Dec 09 23
100 95 90 Manufacturing Supplier Deliveries - 59.4 vs Prices Paid- 82.0 Pricing Power is typically created by Slowing Supplier Deliveries 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 Supplier Deliveries Prices Paid 24
Industries That Drive the Economy Industry Sector Dependency Outlook Materials Manufacturing Autos and Housing Industrials Manufacturing Autos and Housing Technology: Telecom Manufacturing Business Investment Consumer Discretionary Manufacturing Consumer Spending Consumer Staples Manufacturing Employment Energy Non-Mfg Autos and Housing Financials Non-Mfg GDP Health Care Non-Mfg Public Policy Retail Non-Mfg Consumer Spending Utilities Non-Mfg GDP
JP Morgan Global PMI Sep 52.5 Aug 53.7 Jul 54.3 Jun 55.0 May 57.0 Apr 57.8 Mar 56.7 Feb 55.4 Jan 56.1 Dec 55.0 Nov 53.7 Dec 55.0 Jan 57.2 Feb 57.8 http://www.ism.ws/ismreport/
Our Big Fat Greek Wedding Crisis Riots
Forces of Change Emerging markets; demographics Public policy price controls; export restrictions; government subsidies, etc. Lagging supply response to higher prices; low commodity inventories Housing / Commercial construction Financial controls; speculation in energy/ commodity markets Currency adjustments; $$ depreciation Inflation - deflation
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The Great Mall of China Dongguan 6 million population 7 million sq ft 7 major theme areas The Mall of America, Disneyworld and Las Vegas combined $2 billion 1500 stores
An 8% drop in the US $ Pay more for travel overseas, e.g. London hotels Oil prices rise as dollar weakens it takes more $$ to buy a barrel of oil Imported goods are more expensive American assets are cheaper for foreign investors; at the same time foreign direct investment may fall due to lack of confidence in the currency Inflation: Fed keeps printing money Reduces the value of Bonds future interest and principal payments Exports improve, but the benefit is offset by paying more for imports
I'm not so much concerned about the return on my money as the return of my money. - Will Rogers, 1933
Thank you!
Appendix 34
Adam Smith once commented, the effort of individuals to improve their condition "is frequently powerful enough to maintain the natural progress of things towards improvement, in spite... of the greatest errors of administration."
Inflation View Myth Reality Costs-push prices higher Prices are set by the costs of production Higher costs can result from inflation, randomness or seasonality ultimately prices are set by market demand Higher wages drive higher prices Government spending causes inflation A supply shock can cause inflation Increased aggregate demand resulting from money growth Norbert J. Ore All Rights Reserved Workers and unions demand higher wages increasing costs Higher government spending will lead to rapid monetary growth and inflation Hurricane, oil embargo cause inflation Central bankers always act responsibly Wage increases in excess of productivity are a result of inflation, not a cause; wages and employment lag growth and contraction Not if financed by higher taxes or borrowing from the public; government spending is matched by lower private consumption and investment Government spending causes inflation only when the Fed prints money to accommodate without forcing consumers and businesses to cut back These result in one-time price adjustments that are absorbed into the economy as a tax on growth Inventory (still at old prices) can mask demand increase and delaying the ultimate higher prices Increased purchases (demand) may result in more demand than can be satisfied thus prices are raised Prices increase as a currency loses its value
Summary Manufacturing ISM Report on Business is a series of diffusion indexes that track month over month change in the sector Simplicity of the methodology allows the sample data to be gathered and disseminated rapidly compared to other reporting methodologies During 2008-2009 timeframe, the series proved its value once again as it was among the first data available
Meet the Press, NBC, 2009 38
"Politics, as hopeful men (and women) practice it in the world, consists mainly of the delusion that a change in form is a change in substance." H.L. Mencken (1880-1956) 39