Comment about the ISM’s U.S. PMI for Non-Manufacturing

September 5, 2019

U.S. share prices were thrust sharply higher today, initially by news that Chinese officials are coming to Washington to resume trade talks, but again later as investors reacted to released U.S. data. U.S. labor productivity and unit labor costs increased robustly last quarter by 2.3% and 2.6% at annualized quarter-on-quarter comparisons. Factory orders advanced 1.4% in July on top of a 0.5% increase in June. New jobless insurance claims were again quite low last week and averaged just 216-1/4k over the final four weeks of August. ADP’s estimate of private sector net job creation in August was 195K, roughly 50K above the prior month’s estimate and exceeding analyst expectations by a similarly large margin.

The most encouraging surprise came from the ISM’s non-manufacturing purchasing managers August Survey, where the overall index rebounded by a sharp 2.7 index points to a three-month high of 56.4. Sub-indices for production and new business went up 8.4 and 6.2 points, and each surpassed a value of 60.0. These results suggest that weakness in manufacturing are not seeping into other sectors of the U.S. economy, but the news may be too good to be true. A separate services purchasing managers survey conducted by IHS produced very different results. That survey’s index dropped 2.3 points to a 3-month low of 50.7, suggesting minuscule improvement on July conditions, and the IHS composite PMI that combines manufacturing and service sectors was also at 50.7, which in that case represents a 41-month low. Compilers of the IHS survey concluded that their data suggests that U.S. GDP in the current quarter may be growing even more slowly that such did in the second quarter, a pace of about 1.3-1.4% to be precise.

As an analyst, I find PMI data quite useful because they shed light on economic activity earlier than hard data like industrial production or retail sales. The shortcoming of PMI reports is that they are derived from surveys and thus filtered through the subjectivity of survey participants’ perceptions and expectations. Only in measured economic activity that arrives with a longer lag do we learn if purchasing managers correctly grasped what actually was happening. And it’s important to realize too that so-called “hard data” are fraught themselves with all sorts of measurement imperfections and revision tendencies. It’s best for analysts consider all the information that can be gleaned — both hard data and survey evidence — and to draw conclusions from trends that are repeated in a number of sources and that are sustained over a string of observations.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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