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Manufacturing production falls 0.3% in the three months to
March, matching the PMI signal
Data indicate first quarterly downturn since third quarter of
2017
Surveys hint at sustained weakness into April as PMI
orders-to-inventory ratio hits one of the lowest in 10 years
The latest official data showed US manufacturing falling in the
first quarter, corroborating the renewed downturn signalled in
advance by IHS Markit PMI survey data. The survey data also hint at
weakness persisting into the second quarter, with the
forward-looking order-to-inventory ratio falling in March to its
joint third-lowest since May 2009.
First quarter downturn
The latest release of official factory output data from the
Federal Reserve showed production dropping 0.3% (1.1% annualised)
over the first quarter, having stagnated in March after falling in
both January and February. Analysts had on average expected
production to rebound in March, but PMI survey data from IHS Markit
had forewarned of a downturn.
The quarterly decline is the first registered by the official
numbers since the third quarter of 2017, which was also the last
time that the PMI had indicated a downturn.
IHS Markit's PMI survey has in fact correctly indicated every
turning point in the manufacturing cycle since data were first
collected 12 years ago with the sole exception of the downturn in
early-2015, which was a time when the official data showed undue
volatility.
The survey's output index exhibits an 89% correlation with the
three-month-on-three-month rate of change in the official series
(which is widely used as a comparable series as it is less volatile
than the month-on-month change, and also helps give quarterly rate
of change signals). The IHS Markit PMI also outperforms the ISM
index, which shows a lower (81%) correlation over the same period,
and which has also exaggerated growth in the past two years (see
chart below).
To calculate the implied rate of change in the official data we
use a simple OLS regression model which uses the PMI output index
as the sole explanatory variable of the three-month change in
manufacturing production. The implied decline in output in the
three months to March was -0.1%, albeit with the rate of
contraction accelerating to -0.6% in March alone.
Weakness sustained into second quarter?
Insights into whether the manufacturing downturn has persisted
into the second quarter will be provided by the flash PMI for
April, released Thursday 18th April. In the meantime, we use the
ratio of new order inflows to inventories of finished goods indices
to provide clues as to future production: if new orders are rising
but warehouse inventories have fallen, then companies will tend to
ramp up production to meet the new demand, and vice versa. In
March, this ratio fell to its lowest since June 2017 (when it
correctly foretold to the prior downturn) and its joint
third-lowest since May 2009.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
