Short Note on ISM Manufacturing Survey

The Institute for Supply Management reports its January manufacturing survey on February 1.  The Bloomberg consensus expects a small increase to 54.5 from 53.9.  This would be the highest reading since last June.  Yes, as the economy picked up some steam after a dismal first half, the manufacturing ISM trended lower.  

Nevertheless, many cite this data as an important barometer of the economy.  The weaker than expected Chicago survey may prompt some to lower their expectations for the national report.  The Chicago purchasing manager index slipped to 60.2 from 62.2 in December and defied expectations for a small rise to 63.

It is true that over the long-term the Chicago PMI is highly correlated with the national ISM survey.  Over the last five years the correlation of the level of the Chicago PMI and the national survey is near 0.90.  However, over the past 2.5 years, the correlation has slipped to almost 0.60.

This modest decoupling of the regional survey and the national one is also evident in the Empire State survey and the Milwaukee purchasing manager survey.  

The Empire State survey is among the first of the monthly reports.  Its correlation over the past five years with the national survey is a little more than 0.75, but over the past 2.5 years, it has fallen to almost 0.50. Recall that the Empire State survey was stronger than expected at 13.48 compared with a consensus forecast of 11.0.  The December series was revised lower to 8.19 from 9.5 originally.  

The Milwaukee purchasing manager survey will be reported a couple hours ahead of the national survey.  The correlation between it and the national survey is almost as strong as the Chicago survey.  Over the last five years the Milwaukee survey's correlation with the national survey is about 0.82. The decline over the more recent 2.5 years is almost 0.59. 

There is some risk that the Fed's more dovish stance changes the dynamics on the way the market responds to data.   It has seemed that often strong US economic data led to euro strength ostensibly on a healthier risk appetite.  That said, the dollar was generally strong in Q4 as the US economy accelerated and the euro zone economy weakened.   

However, with the bar to QE3 seeming to have been lowered, it is possible that disappointing data spurs risk taking (euro and stock market gains) on ideas that a new round of asset purchases is more likely.  An important caveat is that judging from the MBS pricing, and confirmed by surveys, many investors have long thought QE3 was likely, meaning the response function to the data may not have changed.