Institute for Supply Management’s manufacturing PMI touches a new high for 2014
The Institute for Supply Management (or ISM) released the manufacturing Purchasing Managers Index (or PMI) for April on Thursday, May 1. The PMI reading for April came in at 54.9%, which was ahead of consensus estimates of 54.3%. The PMI was also higher than the 53.7% clocked in March. The increase in PMI over March’s reading indicated that U.S. manufacturing grew at an increasing rate in April, largely powered by the key employment sub-index, which increased by 3.6% to 54.7%, the highest among all sub-indices. This was also the 11th consecutive month in which the U.S. manufacturing sector expanded and the 59th consecutive month in which gross domestic product (or GDP) grew.
What is the purchasing managers’ index?
In general, the PMI is a composite measure of economic activity. The PMI is based on surveys of a cross-section of private sector companies, which may be selected based on objective economic criteria, such as revenue contribution to industry sales or industry contribution to GDP.
Headline PMI readings are usually issued for the manufacturing and service sectors. Also, these indices are composed of a number of diffusion indices that give a measure of a particular economic activity: for example, employment, new orders, and deliveries. Index readings are expressed on a scale of 0–100, with a reading above 50 meaning that business activity has expanded month-on-month, while a reading below 50 implies a decline. A reading of 50 is a neutral reading and would mean business activity has neither expanded nor declined.
Key highlights of the April release
The growth in manufacturing was broad-based, with 17 out of the 18 industry groups reporting expansion. The apparel, leather, and allied product industries reported the highest growth. Non-metallic mineral products were the only industry reporting a decline.
Implications for GDP growth
Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee, stated, “The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through April (53.3%) corresponds to a 3.3% increase in real gross domestic product (or GDP) on an annualized basis. In addition, if the PMI® for April (54.9%) is annualized, it corresponds to a 3.9% increase in real GDP annually.”
This implies an above-average growth in GDP, as the GDP growth rate in the U.S. has historically averaged 3.24% from 1947 until 2013.
PMI releases give a monthly overview of the state of the manufacturing and service sectors. The reports can have quite an impact on broad-based indices like the S&P 500 Index (SPY) and manufacturing sector ETFs like the Vanguard Industrials ETF (VIS), which includes companies like Honeywell International (HON) and Boeing (BA). ETFs which include U.S. fixed income debt like the Vanguard Total Bond Market ETF (BND) would also be impacted by PMI reports that exceed or miss expectations.
In the following sections of this series, we’ll discuss the U.S. manufacturing PMI report issued by Markit Intelligence, a private data provider, which was also released on May 1. We’ll discuss the impact of the two PMI releases on stock and bond ETFs. Please continue reading.