What is the Chicago PMI?
The Chicago Business Barometer is a closely watched leading indicator of U.S. economic activity, and it’s based on a survey panel of purchasing or supply-chain professionals, primarily drawn from membership of the Institute for Supply Management-Chicago (ISM-Chicago). The survey includes both manufacturing and non-manufacturing firms, many with global operations. The Chicago PMI is a composite diffusion indicator made up of production, new orders, order backlogs, employment, and supplier deliveries. It’s designed to predict future changes in gross domestic product (or GDP). An indicator reading above 50 indicates expansion compared to a month earlier, while readings below 50 indicate contraction. A result of 50 is neutral. The farther an indicator is above or below 50, the greater or smaller the rate of change.
What did February’s reading indicate?
In February, the Chicago PMI recorded an increase of 0.2 to 59.8. Chicago area businesses were apparently less impacted by adverse weather conditions. The most compelling reading was the employment index, which shot up 10.1. New orders and production readings were also reportedly positive, although they increased at a slower rate compared to last month.
How does the Chicago PMI affect investors?
An increase in production and new orders would benefit manufacturing companies, as it would directly translate to top-line growth. ETFs with exposure to the industrial sector include the Vanguard Industrials ETF (VIS), which tracks the MSCI US Investable Market Industrials 25/50 Index. An increase in production and new orders would also significantly benefit companies that act as suppliers to these sectors, like Danaher Corp. (DHR) and United Technologies Corp. (UTX), which are two of the top ten holdings in VIS.
An increase in production activity will also imply that economic growth is gaining traction and that the low rate environment may not persist. Bond prices move inversely to interest rates. One way of profiting from rising rates is to invest in inverse bond funds like the ProShares Short 20+ Year Treasury Fund (TBF) and the Barclays iPath US Treasury 10-Year Bear ETN (DTYS). Inverse bond ETFs provide the inverse return of the underlying benchmark index.
To find out about the second manufacturing PMI reading due to release on Tuesday, read on to Part 3 of this series.
© 2013 Market Realist, Inc.