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ISM Manufacturing New Orders Index Not Seasonally Adjusted
Updated 5/6/13 The April headline seasonally adjusted aggregate Manufacturing Purchasing Managers Index reading of 50.7 was slightly below the consensus expectation of 51, as economists overestimated the strength of US manufacturing. April’s reading was also below the March index of 51.3. Since these numbers are all seasonally adjusted, they often do not represent what actually happened during the month.
To get a feel for the manufacturing economy represented by this index I track the not seasonally adjusted ISM Manufacturing New Orders index. It rose from 46.4 in March to 48 in April. (See Why Seasonal Adjustment sucks).
The ISM reports only the seasonally adjusted data. To derive the actual data we need to divide the reported data by the SA factors applied, which are established by the US Department of Commerce each year in advance. Later, all of the data SA is rebenchmarked and restated. In January the ISM issued a restatement of all the Manufacturing and Non Manufacturing indexes since 2009, making the previously reported headline numbers reported for each month essentially garbage.
In order to get an idea of how good or bad actual, not seasonally adjusted number is, I compare it to the same month in past years. The index rose in April by 1.6 points. April was an up month in 7 of the past 10 years. The April average month to month change over the previous 10 years was +0.9. Last year the reading was +0.4 and in 2011 it was +0.7. This year was better than the last 2 years and better than the average of the past 10 years.
That sounds good, but the March level was the lowest since 2009. The trend has been down since 2010 and the year to year change is near the same rate as last year. There’s no sign of improvement.
The fact that the readings are below 50 indicate contraction. If you’re looking for a correlation with stock prices, you won’t find one. The market has shown that it can go on its merry way for years even as US manufacturing slowly disappears.
The New Orders index trended lower from late 2003 to 2007 while stock prices continued to rise. That was a potential hint that the stock market may have been in a bubble beginning in 2005. The index briefly went negative in early 2007, but then recovered until October 2007, which was about when the Fed pulled the plug on the System Open Market Account (see below). The index next went negative in January 2008, by which time the market was down for the count.
The manufacturing sector represents about 12% of the economy. The ISM manufacturing new orders index isn’t even a very good indicator of the overall US economy, and it is completely useless as an indicator of the stock market trend.
The services sector data representing the bulk of the US economy is released a few days after the manufacturing data.
ISM Non Manufacturing (Services) New Orders Index
5/5/13 Unlike manufacturing, the ISM Non Manufacturing (Services) New Orders Index, not seasonally adjusted, is holding above the 50 level that is the dividing line between expansion and contraction. It rose by 1 point in March to a reading of 51.2.
There’s no seasonality evident in the data over the past 10 years. April had both increases and decreases. Last April had a decline of -4.1 and April 2011 had a decline of -4.9 . The current reading left the index 1.1 points above the year ago figure which was a turnaround from the weakening trend of the prior two years.
The Non Manufacturing index represents the bulk of the US economy. It is less volatile than the Manufacturing index which is subject to the large swings inherent in capital goods orders. Both had been decelerating since 2010, but now the services index has upticked on a year to year basis to remain above the neutral line and continue to indicate expansion. Meanwhile the manufacturing index has continued to weaken in contraction territory.
The negative divergence between this indexes and stock prices may be a long term warning sign, but negative divergences persisted for 4 years before the markets topped out in 2007. Therefore like the Manufacturing index, this indicator cannot be used for market timing purposes. It does suggest that the Fed is driving stock prices to levels which can only be sustained by continued money printing. The new orders indexes suggest that economy is not responding in kind and that the economy probably does not have self sustaining momentum without the Fed providing artificial stimulus.
Factory Orders, The Stock Market, and The Fed
5/5/13 New factory orders (actual, adjusted for inflation and not seasonally adjusted), which is a broader measure than durable goods orders because it includes non-durables, dropped 3.3% on a year to year basis in March. It was the 5th straight year to year decline. As the Fed inflates a stock market bubble, US manufacturing is shrinking.
I adjust this measure for inflation and use not seasonally manipulated data in order to give as close a representation as possible of the actual unit volume of orders and thus the actual trend.
Real new factory orders, NSA, were up 5.2% month to month. March is always an up month, rising in all of the prior 10 years. March 2012 saw a rise of 6.8%. In 2011 was it was up by 19.2%. The average March change during the previous 10 years was an increase of 12.8%. This year’s number was worse than the average and worse than the last two years. In fact it was the worst March performance since 1998.
More important is the big picture trend and the response of manufacturing to Fed stimulus. After rebounding sharply from the 2009 bottom through early 2011, the trend then stalled. The annual growth rate has been in a downtrend since April of 2010 and has been zero or a negative number for the past year. Since the Fed started settling its QE3 MBS purchases in November 2012, this index has shown no material improvement. The money printing is not trickling into the manufacturing sector. The ISM data for April suggests that the factory data for that month won’t be much better. So don’t believe the hype about a return of US manufacturing. It ain’t happening, as the chart above makes clear.
Until 2010 manufacturing had tended to trend with stock prices, with both clearly reacting to Fed quantitative easing or tightening. In 2008, the Fed had begun to withdraw liquidity from the markets by shrinking the SOMA while conducting emergency lending operations to the banking and shadow banking structures. At the same time the Fed cut out the usual direct funding of the Primary Dealers. The end-around allowed the money to reach manufacturers while starving the securities dealers. There was a late burst of manufacturing activity.
Draining funds from the Primary Dealers caused the 2008 stock market crash, but because the Fed was flooding other financial structures with liquidity directly, manufacturing held up for a while. It finally succumbed when the Treasury crowded out the rest of the market in 2008 when it raised $800 billion in a short period of time in September-October 2008 for stimulus and TARP.
In 2011, manufacturing turned up in March, the usual peak month. That was several months after QE 2 started. I wrote last month, “To be fair, we should give this data until March 2013 to see if it will respond to QE3-4.” That date has passed and the US manufacturing trend has shown no improvement.
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