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Why Markit shows you should ignore the downward economic revision

Why Markit shows you should ignore the downward economic revision (Part 1 of 4)

Why Markit shows you should ignore the downward economic revision

The Markit Purchasing Managers Index assesses the outlook of manufacturing in the U.S.

The Markit Purchasing Manager’s Index (PMI for short) is similar to the other regional PMI indices, but it covers the entire country. The ISM PMI looks at various business indices, like new orders, production, employment, supplier deliveries, inventory, customer inventories, prices, backlog, exports and imports, and capital expenditures. A reading over 50 means manufacturing is generally expanding. A reading over 42 indicates the economy in general is expanding.

Markit PMIEnlarge Graph

Many industries watch manufacturing activity in order to predict growth

Any economically sensitive business, especially cyclical businesses, wants to pay attention to the ISM data. Homebuilders like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), Standard Pacific (SPF), and PulteGroup (PHM) are particularly cyclical and will correlate with manufacturing activity. Even some of the commercial REITs will correlate, particularly those in the logistics space, like Prologis (PLD).

Manufacturing activity has been generally improving all year, and the index has hit a post-recession high

The Index of Overall Activity rose to 61.1 in June, from 58.4 in May—the highest level since 2011. The report acknowledges the dismal Q1 GDP revision but also says that the rebound seems more than just a weather-related snapback. Markit is forecasting that the June payroll number will probably come in around 250,000, which is a solid number. Factory hiring increased by 12,000 in June, while services hiring increased much more.

Demand for goods and services continued to improve, as did hiring, suggesting that the downward revision to Q1 GDP was more or less a fluke and shouldn’t be used to really extrapolate the state of the economy. The bond market more or less agreed, rallying a few basis points, but nothing like it would have if it considered the economy to be heading into a recession.

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