The Institute for Supply Management’s Manufacturing Index report shows that despite a continued slump in home sales, the economy is in a slow but steady recovery. January was a good month for manufacturers, showing a 1 point increase over December bringing the Purchasing Manager’s Index (PMI) to 54.1%. This number is right on track for an economy that is full on in recovery, yet still a slow and steady recovery. The number sparks confidence in investors that the economy is in fact moving in the right direction, and gives them a positive outlook for the future.
The PMI is the overview of the report, the rest is broken down into more defined sub-sectors of the industry. This report, as mentioned, shows a number over 50% meaning the economy is in expansion. The expansion makes for a bullish stock market, while the slow recovery makes for a bullish bond market. As the number creeps higher, the stock market too as that is a sign that corporate profits are on their way up encouraging people and institutions to invest more money. At the same time, the bond market does not do as well with a rapid increase in the PMI. With a number just above 50% the market will perform well in both markets as the overall GDP rises. Historically the PMI rarely rises above 60%, so while this number appears low, it is a good healthy number.
The full report shows a mix of ups and downs from the various sub-sectors. While their indices vary little from December to January, it is important to note that the difference between those reporting “lower” numbers and “higher” numbers in areas such as pricing, employment, and new orders, are mostly in the positive (e.g. 27% report higher, while 20% report lower leaves a net of 7%). This reflects well for the sentiment of the industries, helping investors to conclude that US manufacturing is strong and will continue to be strong. The ISM comes out once per month and measures the health of 300 manufacturing firms in areas such as employment, production, orders, inventory, and more. The overall number is given as a percentage, over 50 meaning the economy is expanding, while under 50 means the economy is contracting.
Like the housing market indices, the ISM is closely watched by investors. The rise in PMI was encouraged by a jump in employment numbers. This signals that the management of the US manufacturing industries sees stronger months ahead. Investors look at these numbers and see that the economy should continue to gain strength and momentum as we come out of the winter months and into the spring and summer. The economic recovery is moving slowly, but manufacturers, investors, and other employers are seeing movement in a positive direction, and predict the continuing strength in all areas.
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