Overview: June readings indicate strong US manufacturing sector
ISM Manufacturing Index
The ISM Manufacturing Composite Index is a diffusion index calculated from five equally weighted components from a monthly survey of purchasing managers at roughly 300 manufacturing firms in the U.S.
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The survey queries purchasing managers about the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. The five components of the composite index are:
- New orders
- Supplier deliveries
- Inventories—their own, not customer inventories
The ISM manufacturing data gives a detailed look at the manufacturing sector, how busy it is, and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a substantial influence on the markets. A healthy manufacturing sector, indicated by rising ISM index points, bodes well for corporate earnings and is bullish for the stock market. However, the bond markets tend to fall when the ISM Manufacturing Index is stronger than expected on inflation expectations.
For the month of June, the ISM reported its Purchasing Managers Index (or PMI) at 55.3 with a 55.4 posted in May, both above the break-even 50. The reading for June released on Tuesday, July 1. It was strongly driven by growth in new orders pointing to acceleration for general activity in the months ahead. New orders are the life blood of business. They are underpinning the manufacturing sector’s economic leadership.
Markit PMI Manufacturing Index
Markit Economics’ release of its PMI for the month of June released on Tuesday, July 1. Markit’s U.S. Manufacturing PMI is based on monthly questionnaire surveys of a selected panel of over 600 companies from all areas of U.S. manufacturing activity.
The flash (indicative) index for June had come in at 57.5 versus 56.4 in the final for May and 56.2 for the May flash. The final June reading came in strong with a 57.3 index points. June’s report was led by improvement in new orders, while the backlog orders remained unchanged. However, export orders till need uplift. These order readings point to a rising rate of output in the months ahead.
The performance of Industrials exchange-traded funds (or ETFs) like the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Co. (GE) and Boeing Co. (BA) in its portfolio, the Vanguard Industrials Index Fund (VIS), and the iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ), serve as a good indicators with respect to the industrial sector.
To understand the effect PMI readings have on markets, please read Why do key purchasing managers’ index readings move markets?
While the manufacturing sector holds its share of importance in the U.S. economy, the real estate sector is one of the most followed sectors by the investing community, especially after the housing bubble of 2008–2009, which took the U.S. economy into the Great Recession. So far, the U.S. economy is still struggling to recover completely from its 2009 lows. The section in this series sheds light on key indicator releases from the real estate sector that have released so far this week.