ISM Manufacturing Index Comes In Well Below Expectations [Dow Jones Industrial Average(INDEXDJX:.DJI), SPDR S&P 500 ETF Trust]

dataDoug Short: Today the Institute for Supply Management published its January Manufacturing Report. The latest headline PMI at 51.3 percent is a major decline from 56.5 percent last month (adjusted from 57.0 percent). Today’s number was well below the Investing.com forecast of 56.4.

Here is the key analysis from the report:

Manufacturing expanded in January as the PMI® registered 51.3 percent, a decrease of 5.2 percentage points when compared to December’s seasonally adjusted reading of 56.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

A PMI® in excess of 43.2 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the January PMI® indicates growth for the 56th consecutive month in the overall economy, and indicates expansion in the manufacturing sector for the eighth consecutive month. Holcomb stated, “The past relationship between the PMI® and the overall economy indicates that the PMI® for January (51.3 percent) corresponds to a 2.7 percent increase in real gross domestic product (GDP) on an annualized basis.”

Here is the table of PMI components.

I’m reluctant to put too much focus on this index for various reasons, but they are essentially captured inBriefing.com’s Big Picture comment on this economic indicator.

This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.

The chart below shows the Manufacturing Composite series, which stretches back to 1948.

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