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A tale of two indicators

The national manufacturing Purchasing Managers Index (PMI) produced by the Institute for Supply Management (ISM) is considered by many economy watchers to be a, if not the, most important leading indicator measuring the health of the U.S. manufacturing sector. Throw in timeliness, a fair degree of accuracy, and a correlation with gross domestic product growth, and you can see why it's an indicator to be taken seriously. On the first business day of each month at 10 a.m., I am one of many analysts around the world constantly refreshing my browser to be one of the first to see the health of the manufacturing sector over the previous month. Our own regional version of this, the Southeast PMI, is produced just up I-75 from the Atlanta Fed at Kennesaw State University's Econometric Center. As its name suggests, the Southeast PMI measures the manufacturing health of roughly the same geographical area as the Fed's district (Georgia, Florida, Alabama, Tennessee, Mississippi, and Louisiana). As one might suspect, these two indicators are usually highly correlated, with major divergences in their data only lasting an average of one or two months.

In August, the national PMI was flirting with contraction territory, which is any reading below 50 on an indexed scale, at 50.6 points. The widely watched release of the indicator on September 1 spooked skittish investors and raised the eyebrows of analysts around the nation. However, here in the Southeast, it looked like a somewhat brighter picture for August: the Southeast PMI reading was higher than the national PMI by more than 7 index points for the month, and it had safely cleared the benchmark indicating growth at 57.8 points. I was blogging about silver linings in the manufacturing sector and the General Motors plant reopening in Spring Hill, Tenn. Could it be that maybe things weren't so bad after all?

Then data for September were released.

The Southeast PMI shed 8.4 index points during September, catching up (or "down," if you will) with the more cautious national PMI. Broad-based losses in every survey category took readings for employment, supplier deliveries, and commodity prices back to historical "norms" from slightly elevated levels, but losses in the new orders and production categories went further south, signaling a possible turnaround in sentiment from roughly the same managers who seemed much more optimistic one month prior. In September, these two critical components of the Southeast PMI—new orders and production—fell below 50 index points for the first time in 2011. This is not the first time those components have dipped below 50 points since the National Bureau of Economic Research declared that the recovery from recession began in June 2009. But if data for October show a new-orders reading below 50, it will be the first two consecutive months below 50 for this component—which is considered to be an indicator of future manufacturing activity—since the recession (specifically, since the first quarter of 2009).

Here's how all Southeast PMI components fared against their national counterparts in September:

National vs SE PMI

Keep an eye out for October data: The ISM releases its reading on the national manufacturing sector on the first business day of each month, referencing the previous month. The Southeast/regional data are released on the fifth business day of the following month by Kennesaw State University's Econometrics Center. To receive a copy of the Kennesaw State University release, sign up to take the three-minute survey at the Econometric Center's website.

By Mark Carter, an economic analyst in the Atlanta Fed's research department

October 19, 2011 in Manufacturing | Permalink


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