A pair of conflicting survey-based readings of U.S. manufacturing clouded the outlook for a crucial sector that struggled last year.
The influential Institute for Supply Management’s purchasing managers’ index dropped to 47.2 from 48.1 for December, the sixth consecutive monthly miss. Readings below 50 indicate contraction and this index has been underwater for four months straight.
A competing purchaser managers’ survey by IHS Markit, however, showed the manufacturing sector had continued expanding in December. The IHS Markit PMI slipped a bit to 52.4 from the prior month’s a seven-month high of 52.6.
The two indexes are calculated differently and have diverged in the past. The IHS Markit index puts greater weight on forward-looking components, so optimism about the future can boost the index above what the evenly weighted ISM index shows. The ISM survey is also more heavily weighted toward large multinational companies, which the IHS argues makes it less representative of the U.S. economy.
“ISM also does not ask respondents to confine their reporting to US facilities/factories whereas IHS Markit specifies that all responses must relate only to metrics from US factories. ISM data could, therefore, be more heavily influenced by conditions of US-owned factories in China, for example, than the IHS Markit data,” IHS’s Chris Williamson argued in October.
It is possible that ongoing sluggishness in Europe is weighing on the ISM number but not the IHS Markit data.
In the recent past, the IHS data has done a better job of predicting the official economic numbers than the ISM data, which tended to be too optimistic. Williamson argues that this year the ISM data is overly negative, writing that “it is possible that the current steep decline signaled by the ISM simply represents another case of the survey exaggerating the rate of change.”
Nonetheless, the ISM survey is more widely followed than the IHS survey.
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