ISM vs Industrial Production: Hype vs Reality
The Wall Street Journal reports Factory Activity Heats Up as Manufacturers Position for Tariffs.
American factory activity accelerated for the second straight month this summer, in part because manufacturers were scrambling to move goods ahead of threatened tariffs.
The Institute for Supply Management on Monday said its manufacturing index rose to 60.2 in June from 58.7 in May. Numbers above 50 indicate activity is expanding across the manufacturing sector, while numbers below 50 signal contraction. The overall ISM index in February hit 60.8, its highest level since May 2004, before easing in March and April. It picked up in May and again in June.
“There’s an extreme amount of activity going on to account for impacts that are driven by the aluminum and steel tariffs, and that is expanding out to other industries,” said Tim Fiore, who oversees the ISM survey of factory purchasing and supply managers.
“Contingency planning [for tariffs] is consuming large amounts of manpower that could be used for more productive projects,” a manufacturer told ISM. “It’s introducing a bunch of inefficiencies,” Mr. Fiore added.
“When suppliers are delivering, manufacturers are pretty much using those supplies right away,” Mr. Fiore said. “At what point does that affect output because you don’t have enough raw materials to satisfy your production?”
Actual Factory Production
Industrial production shrank in May. Manufacturing production is still well below the previous peak.
The Fed blamed a fire. It may as well have blamed the weather. For discussion, please see Industrial Production Declines in May: Fed Blames a Fire at a Parts Supplier.
ISM anecdotes and diffusion indexes are one thing. Actual production is another.
That said, the manufacturing trend is indeed up, albeit far less than one might expect from ISM and a myriad of Beige Book anecdotes.
Let's assume the ISM anecdotes are 100% accurate. What do we have?
We have a rush to get supplies to beat Trump tariffs and retaliations that are guaranteed to slow the global economy.
On April 18, I noted Fed's Beige Book Notes "Dramatic" Increases in Prices Due to Tariffs.
A day later, I dug a bit deeper with Fantasyland Reality Check.
ISM a Leading Indicator?
On March 2, following a lunch with Jim Bianco at Bianco Research, I asked ISM a Leading Indicator? Of What?
Bianco says the "ISM is distorted not only by the survivor bias but by answering bias." He stopped responding years ago.
Nonetheless, let's give the ISM anecdotes the benefit of the doubt. Is a rush to beat tariffs, indicative of "activity heating up"?
Mike "Mish" Shedlock