ISM Interpretation: Watch that Decimal Point!

Today's ISM number for May came in at 49.6, slightly below the level indicating expansion in manufacturing, but a touch better than expectations.  Is the ISM report important?  We'll look first to news reports and pundits, and then provide our own take.

News Interpretations

Bloomberg gave a balanced account, noting economic forecasts as follows:

Economists forecast the index would decrease to 48.5 from 48.6 in April, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 46 to 50.5.

and also…

ISM's gauge of new orders increased to 49.7 from 46.5, while a production measure rose to 51.2 from 49.1, ISM said.

The Wall Street Journal's Real Time Economics has the usual nice collection of economic reaction.  The title, "Economists React: ‘Severe Recession Has Been Averted’?" captures the main theme.  The economic data have been good enough to cause many to reconsider their recession predictions.  Read all of the comments for yourself, but the consensus indicates a greater chance of Q2 GDP at a rate of 1.5% or so.

Significance of the Report

At "A Dash" we always wonder how economists can make forecasts of survey results like this one or of consumer confidence.  The analysts at share this concern.  The following describes their concern:

This is a highly over-rated 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.  That may well be what is happening at present with exports booming at large firms, but not necessarily across all manufacturing sectors.  The current readings on the ISM manufacturing index are providing a more negative view of conditions than the actual industrial production data.  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. 

We see the ISM data as a contemporaneous economic indicator that we analyze along with payroll employment.  We have frequently warned in the past when we expect a surprising negative result with market impact.

To summarize, this was good news, showing an economy that is growing below trend but defying the recession predictions.

An Alternative Viewpoint

Over at The Big Picture, one of our featured sites, Barry Ritholtz, the self-styled gonzo economist, had a different view about what we should see in this report.  He pounced with the "Bad Headline of the Day."  His point was that the article called the report a gain in manufacturing activity, which it was not.  He did not, however, mention that the report implied a higher GDP than was expected.

We congratulate Barry on noting the decimal point error of the headline writers, but we are left wondering about the main story.  Does he believe that this was bad news?  Also, this is a survey.  Is he considering the confidence interval and statistical significance?  Can we be confident that the null hypothesis of "Not 50" can be rejected?

Big Picture Reader Contest

The quibble over the decimal point created a mini-contest in our office.  We started arguing about data interpretation on The Big Picture.  We have recommended this site since our inception, and we read it daily, usually with great care.  We also watch Barry on TV, as do our clients.  Sometimes we dig into the archives, usually when we are trying to answer a question like "What did people think was wrong with the market in June, 2004?"  The answers are all there.

But back to the contest.  We offer a prize to the reader who can find an article on The Big Picture where Barry analyzed the data and suggested that the results were more positive for the market or the economy than the official report suggested.  The prize goes to the most recent entry.  It must be a regular report, of the sort listed on the calendar, where Barry's interpretation was more bullish than the report seemed to indicate at face value.


Each economic data point shows an economy slogging along below trend, at great cost in terms of lost potential, but not as bad as many expected.  Today's economic numbers were pretty good, but were overwhelmed by the S&P decision about future writedowns for some investment banks.

We shall look at the payroll employment report forecast later this week.  Meanwhile, our indicators respect the tape.  We are more cautious in the intermediate term.

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  • David Merkel June 2, 2008  

    For what it is worth, I remember Ed Hyman of ISI Group saying that he only worries about recession when the ISM goes below 47. My memory could be faulty, though.

  • Tamas June 3, 2008  

    I value your analysis, but find your contest somewhat worthless. Barry could be posting a bearish commentary, but still could be 100% invested in Oil, IBM or Mastercard.
    Also, once you have built up a large base of followers, it would be foolish not to live up to their expectations. While markets may demand to change your opinion all the time, most successful media outlets thrive by specialized compartmentalization.
    However it could be worth monitoring when he truly flips to bullish posture, as that may be the time to consider taking profits.

  • RB June 3, 2008  

    Briefing’s criticism of the ISM index is a bit lame. ECRI does not use this in isolation but as one of the components of their leading indicators. see for example,

  • VennData June 4, 2008  

    To David Merkel’s point Gene Epstein of Barron’s – Economic Beat – has also claimed sub-50 diffusions (47 or 48) are positive.