Plummeting Business Orders Sound the Alarm
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the cliff-notes:
- the ISM Manufacturing survey showed new orders dropped to 45.4 in May
- employment in manufacturing rose to 51.1
- weakness in manufacturing always leads GDP and forecasts recessions
Today, the manufacturing report for May by the ISM (Institute for Supply Management) was released. It gets the pulse directly from people at the mouth of the economic river, per se, making it a great leading indicator. Changes in the ISM Manufacturing survey have always signaled future expansions and contractions in GDP. Here's how the survey is conducted:
- Respondent Base: The survey targets purchasing and supply executives from over 300 industrial companies, representing various sectors within manufacturing.
- Conversion to an Index: The index is calculated based on the percentage of respondents reporting higher new orders minus the percentage reporting lower new orders, with adjustments for seasonality.
- Interpretation of Index Values:
- Above 50: Indicates growth in new orders, suggesting expansion in manufacturing activity.
- Below 50: Indicates a decline in new orders, suggesting contraction in manufacturing activity.
- At 50: Suggests no change in the level of new orders.
- Monthly Release: The survey results are released monthly, providing timely insights into the state of the manufacturing sector.
Economists, analysts, and business leaders use the ISM Manufacturing Survey to gauge the health and direction of the manufacturing industry, and therefore the broader economy. Survey says? Deceleration, with a side of supportive employment conditions. The Prices Paid component fell to 57, well below expectations, the New Orders component fell to 45.4, a massive 4-point miss lower than expectations, while the Employment component rose to 51.1, meaning more respondents are reporting rising employment levels at their firms:
New Orders were particularly abysmal. Isolating it in pink with the headline PMI in white, look at how badly New Orders plummeted in May. From 49.1 to 45.4, the largest month-over-month decline in the index in 3 years. Manufacturing respondents are receiving fewer new orders from upstream buyers. Now that the entire index is in contraction territory below 50, i.e., more respondents say that conditions are worsening than improving, this may be the hallmark of a cycle shift into a forthcoming recession. An imminent recession is not my base case, but I have my eye on leading indicators such as this one:
Material weakness, if it continues, in the manufacturing space can and will trickle down into employment, then consumption, and then prices. Soon after that, economic growth as measured by GDP will tip negative. Corporate earnings have been soaring these last several months despite the Fed's rate hikes that are attempting to cool them off. Should ISM Manufacturing continue sitting in contraction and venturing deeper into it, it will show up in weaker corporate earnings, layoffs will rise from their cycle low and accelerate, consumption will worsen as people tighten up their spending, and recession is here. Look at the close relationship between ISM Manufacturing and GDP, lagged by ~6 months:
Final thought: plenty of noise to sift through, always have your eye on leading indicators and the broader cycle to keep in touch with the true signal.
Take it easy,
Joe Consorti
Theya is the world's simplest Bitcoin self-custody solution. With our modular multi-sig vaults, you decide how to hold your keys.
Whether you want all your keys offline, shared custody with trusted contacts, or robust mobile vaults across multiple iPhones, it's Your Keys, Your Bitcoin.
Download Theya on the App Store.