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Wednesday, September 3, 2014

DOES THE ISM MANUFACTURING REPORT ON BUSINESS TELL ANYONE ANYTHING?

So there is this association named the Institute of Supply Management. The workers of the ISM publish a few indexes each month, under the heading of the ISM Manufacturing Report On Business (ISM MROB),which they claim as a barometer of manufacturing activity of the previous month.



Supposedly, the ISM MROB relies on "hard data rather than on conjecture," at least that is what those at the ISM claim.  According to the ISM folks, the index can explain about 60 percent of the annual variation in GDP. So, in other words, the index is off by a whopping 40%, 100% of the time!

The clever ones at the ISM publish something called the PMI, which is a cumulative index comprised of five lesser indexes, each apportioned at 20%. To calculate the lesser indexes, the ISM folks ask more than 300 purchasing and supply executives whether particular activities for their organizations have increased (better), decreased (worse), or remained unchanged (same) from the previous month in these five categories — New Orders, Production, Employment, Supplier Deliveries, Inventories.

And then the ISM wizards use this formula:

% who say better + ( ½ × % who say same). 

So if 10% say new orders were better in the last month only and 50% say last month new orders were unchanged, the reading would be 35% since  0.1 + (0.5 x 0.5) = .35.

So what is wrong with this?

Well, the number of orders can rise but the amount of goods sold could be less. Orders for new goods could be smaller. The number of those employed could be more, but because of high unemployment, wages paid could be less.

When rising, are rising inventories good or bad? Rising inventories can be good if manufacturers are accumulating inventory soon to be sold to wholesalers who are prepping for a robost Christmas shopping season expected by retailers.

The production component might tell anyone something, that is, if the survey participants consider units sold rather than income earned when they respond. Activity increases when anyone makes more stuff and sells more stuff, not when anyone makes the same sum of stuff as before but sells at higher prices. Higher prices could reflect more cash and credit in circulation owing to Fed Res bankers buying bonds rather other firms securing credit now against likely profits of future.

Also surveyed for the report, but not included as lesser indexes in the PMI Backlog of Orders and Prices. A rise in a backlog of orders might tell us something as well. Backlogs can build owing to labor shortages or material shortages. As well, a backlog of orders could arise from manufacturing or management incompetence.

A rise in prices could come from a banking expansion of discounted commercial paper or from quantitative easing as mentioned above. From which cause would you consider good for an economy, legit business expansion through commercial paper or artificial creation of bank credits through government bond purchases?

Many peddle propaganda about the ISM report as "important" and "trusted economic measure." Amusingly, Ph.D. jokers like Alan Greenspan and Joseph Stiglitz sing praises of the ISM. As you might recall, Alan Greenspan is the former Fed Res chair who failed to see the largest credit bubble in banking history, the one over which Greenspan presided.

Purportedly, an index reading of the PMI below 50 signals recession and a reading above 50 indicates expansion.