Here’s an interesting chart from a tweet today. I cannot make heads or tails out of the proposed idea.

The Claim

The claim is the ISM’s nonmanufacturing rate leads changes in core CPI by one year.

The results looks random to me. Correlation and inverse correlation are roughly equal.

The basic problem with these kind of charts is they presume something that happened a year ago has that much influence over events today.

It almost never works out because there are too many other variables. Thus, the boxes that I drew showing inverse correlation happen about 50% of the time.

This ISM variable predicts nothing, at least related to the CPI.

I am not doing this post to knock Sonders. She posts some great charts and lots of interesting ideas. Rather, I wanted to write about ISM anyway.

Survivor Basis

I had lunch yesterday with Jim Bianco, at Bianco Research. We had a great discussion about the ISM.

Since 2007, ISM membership has declined by about 33%. The companies that remain display a survivor bias. They made it through the great recession intact. And they tend to be more bullish.

Jim mentioned a Fed study that came to the same conclusion. The regional manufacturing surveys all have the same flaw.

Jim also mentioned that his firm gets polled in the ISM Nonmanufacturing survey. He has a handful of employees.

His firm has the same weight in the survey as Walmart which may be hiring or firing thousands of employees. I have mentioned this idea before, but now I have a concrete example to provide.

Response Bias

Historical highs are all distorted not only by the survivor bias but by answering bias. Biano stopped responding years ago.

How many others stopped responding? At what impact?

Here’s a hint: None of the manufacturing reports match actual factory production.

Think about the Dallas Fed region for a moment. When oil crashed, numerous businesses went under. There’s a huge, recent survivor bias in the Dallas Fed region.