Two key U.S. manufacturing indexes have diverged sharply
The ISM's November U.S. manufacturing index got all the headlines with a fourth straight reading showing the industry in contraction, but IHS Markit's index was also released Monday and told a very different story.
What's happening: Both surveys are well respected by investors and economists, but follow different methodologies. This seems to have created a widening divide in which IHS Markit's data is showing a solid recovery in U.S. manufacturing while ISM's is showing further deterioration.
Why it matters: Manufacturing is a leading economic indicator and if ISM's data is correct, the U.S. economy could be in peril.
- Alternatively, if IHS Markit data is correct, it appears the industry has found its bottom and has steadily been rebounding over the past few months.
Details: ISM uses five components, each weighted evenly at 20% — new orders, production, employment, supplier deliveries and inventories.
- IHS uses a weighted average that gives greater importance to new orders (30%), output (25%) and employment (20%), and lower weighting to suppliers’ delivery times (15%) and stocks of purchases (10%).
Be smart: The ISM survey includes only members of the Institute for Supply Management, making it more consistent but also potentially more prone to groupthink. Analysts also have suggested that this makes it more likely to focus on larger companies.
- IHS Markit says its survey panel includes more companies and is larger than the ISM's stated panel size.
- The company "surveys just under 800 manufacturing companies (approximately double the size of the ISM panel size) from which an 80% response rate is typically received," IHS Markit's chief business economist Chris Williamson wrote in a recent explainer.