November 1, 2013
Statement from LIA Chief Economist John Rizzo on Institute for Supply Management Survey Results
By: Dr. John A. Rizzo
"Survey results today from the Institute for Supply Management (ISM) suggest that, despite the Federal Government shutdown, the U.S. manufacturing sector expanded at its fastest pace in 2-1/2 years last month. The ISM index of national factory activity reached 56.4 in October, the best reading since April 2011. A reading above 50 indicates explansion. Yet just one week ago, survey results from the data firm Markit concluded that its manufacturing index had declined to 51.1, the lowest level since October 2012.
What can explain this discrepancy? Both ISM and Markit collect data from managers at private companies and use the same five sub categories in constructing their indices. However, they compile this information differently. While ISM weights each sub component equally, Markit applies different weights. This appears to account for the discrepancy, which paints a very different picture for manufacturing activity in October. It is not clear why or how subcomponents should be weighted differently as in the Markit approach. And a concern is that one can greatly influence the index through the weighting system rather than the value of the sub components themselves. But in any event, that one major index of manufacturing points to expansion in October is encouraging news and suggests that economic damage from the shutdown will be limited."