On consecutive days last week, economic indicators were released painting a mixed picture about manufacturing’s economic strength.
On Jan. 3, the Institute for Supply Management released its monthly manufacturing index. It had a noticeable drop, to 54.1% in December from 59.3% the month before. That meant manufacturing was still expanding, but at a slower rate. Anything above 50% is positive territory.
Normally, the index, known as the PMI, doesn’t swing that much month to month. The biggest drag was new orders. That part of the PMI plunged to 51.1% down 11 percentage points from November.
The next day, the U.S. Bureau of Labor Statistics released its monthly jobs report. That showed a gain of 32,000 manufacturing jobs for December and 284,000 for 2018. That was part of an overall increase of 312,000 non-farm jobs, hailed as good economic news. Among those commenting was President Donald Trump on Twitter.
So why the mixed impression? Part of it depends on the nature of the two monthly reports.
The PMI is considered a leading indicator. It’s intended as an early look at where things are headed. It’s based on a monthly survey of 350 supply executives across 18 industries. Even with the big dip in December, the PMI has had 28 consecutive months of growth.
The drop in new orders potentially is the most worrisome aspect of the December report. Orders received now dictate production in the coming months. For much of 2018, new orders were coming in at strong levels, according to the ISM survey.
Timothy Fiore, chairman of ISM’s Manufacturing Business Survey Committee, said his group was surprised by the severity of the December drop. “This came out of left field,” he said during a conference call last week.
Still, he said it was far too early to discuss trends. “One point isn’t enough,” Fiore said. “We’ll have to see what January brings us.”
On the other hand, the monthly jobs report, including the U.S. unemployment rate, is a lagging indicator. That means it comes after an event or trend. (See this entry at the Investopedia website for more details.)
Essentially, the jobs report’s portion about manufacturing has been confirming that industry has enjoyed a strong economy. Companies often run operations on overtime before hiring on new workers.
ISM in December issued a semi-annual forecast calling for growth to continue but at a slower rate in 2019. There are also uncertainties, particularly with trade tensions. The U.S. and China have paused a trade war. But that outcome remains to be seen.
As a result, the monthly economic news related to manufacturing will bear watching. There may be more mixed reports ahead.