In following trying to see whether we are really headed for a double dip I have been following the regional manufacturing surveys.
Why are these an important indicator?
Well there is a bit of a three-step but it goes like this:
1) Regional Surveys help us to forecast the national ISM
2) The National ISM helps us to forecast manufacturing payroll growth
3) Manufacturing payroll growth is “key” in recessions
I don’t have a graph to show you how closely the regionals match to the national ISM. Indeed, you would need a forecasting formula. But, suffice it to say lots of bad regional numbers do not add up to a good national number.
I can, however, show you national versus manufacturing growth over the last 30 years.
Though you can see some gaps in recent years the match up is incredibly tight and the gaps represent a secular trend downward in manufacturing growth. If we zoom in the time horizon the strong correlation re-appears.
This is the last ten years
Crazy tight huh? These aren’t even the same kind of units. One is a diffusion index and the other is a change in raw count. Its uncanny.
Now why is manufacturing so important. Because while manufacturing has declined without a recession, a recession has thus far never occurred without a decline in manufacturing.
Strikes in the early part of the century make the monthly data extremely bumpy and hard to read. When a strike is on manufacturing employment collapses and then when it is off manufacturing employment zooms.
But we can see the same thing by looking at year-over-year instead of month-over-month.
You can see that since we have been recording manufacturing employment there has never been a recession without a decline in manufacturing jobs. Its to quintessential cyclical sector.
So we look at regionals to guess ISM. ISM basically tells us manufacturing payroll growth and a decline manufacturing payrolls has been a pre-cursor for every recession.