Two different measures of U.S. manufacturing activity have been sending very different signals since the summer of 2019.
Manufacturing activity is closely monitored because of its high correlation to U.S. GDP growth. Contractionary readings from the ISM beginning in August of 2019 (and now in the fifth consecutive month) turned many market participants prematurely cautious last year. IHS Markit’s gauge never went into contractionary territory and rewarded those who followed it as it better corroborated the more upbeat story coming from other corners of the U.S. economy.
A potential explanation may lie in the compositional differences between the two surveys. IHS Markit surveys approximately double the number of companies and has more small and medium size business representation than ISM. In addition, ISM does not require their responses to relate to U.S. factory activity only. Therefore, a China slowdown and supply chain disruptions from a very large company may have an outsized impact on ISM and overstate the degree of malaise in the broader manufacturing sector.