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Recap: Three out of five Fed District Bank surveys of manufacturing point to slower ISM Manufacturing Index

It is a mixed bag for the factory sector across the five Fed Districts that report a survey of manufacturing. The surveys are all somewhat different and none of them line up exactly with the ISM Manufacturing Index in terms of its components. The headline indexes from the New York, Dallas, and Philadelphia Feds reflect sentiment about general business conditions and are not calculated from components. The Richmond Fed index is a weighted average of three components (orders, shipments, employment) and the Kansas City index is the average of five components (orders, production, employment, delivery times, and raw materials inventories).

The New York report had a mild increase to 8.8 for the general business conditions in February, up from 3.9 in January, but substantially below the trend of most of 2018. This has the weakest correlation with the ISM. The New York-ISM equivalent is also relatively low in correlation to the ISM number. It rose only 0.6 point to 52.6 in February.

The Philadelphia general business conditions index fell to -4.1 in February after 17.0 in January, and was the first negative reading in a little under three years. This index has the second strongest correlation to the ISM number, and has the strongest correlation for the Philadelphia-ISM equivalent, which fell 2.4 points to 52.4 in February.

The Richmond Fed composite manufacturing index rebounded to 16 in February after -2 in January and -8 in December. This index has the highest correlation with the ISM data and often leads the other Districts in the direction for the factory sector. However, recent volatility suggests it is to be relied on less this month. Richmond-ISM equivalent index has the second strongest correlation with the national report and it rose 5.7 points to 56.4.

The Dallas Fed general activity index had a solid rise to 13.1 in February after 1.0 in January, but looking at the Dallas-ISM equivalent, it fell 1.0 point to 52.6 in February, suggesting that the subindexes were not fully backing up the headline. The Dallas-ISM equivalent was down 1.0 point to 52.6 in February, but it has the softest correlation with the ISM report.

The Kansas City Fed’s manufacturing index fell to 1 in February from 5 in January and was the lowest in over two years. The Kansas City-ISM equivalent was down 2.6 points 51.0 in February. It has a middling correlation with the ISM number.

The bottom line seems to be that manufacturing conditions have softened and become more volatile since late 2018, and have settled at a somewhat lower trend level, albeit one consistent with modest expansion. The equivalent indexes — calculated using the five components closest to the ISM report — with the two best correlations tell exactly opposite stories, placing expectations for the ISM Manufacturing Index for February at 10:00 ET on Friday somewhere in between. I would anticipate a lower reading than the 56.6 in January, but one remaining in line with moderate expansion.


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