March manufacturing releases are critical in assessing a recovery

What is the Institute of Supply Management’s (or ISM) Purchasing Managers Index (or PMI) for manufacturing?

The Purchasing Managers Manufacturing Index (or PMI) is based on a monthly survey of selected companies that provides an advanced indication of what’s really happening in the private-sector economy. A reading above 50% indicates that the private manufacturing sector has expanded, while a reading below 50% indicates that private sector manufacturing output has contracted.

What did February’s PMI reading indicate?

Although February’s reading for the composite index was up 1.9, to 53.2, over January’s reading, weather continued to impact shipments and deliveries, which were all down sharply from January. However, among the report’s positives were new orders, export orders, and backlog orders—which were all up.

What should investors look for in March’s report

The March report will truly indicate whether manufacturers across the country have shrugged off the impact of the winter. A nice bounce back in March’s report due to production cuts in January and February due to adverse weather conditions and slack demand would be an added bonus.

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 State Street Industrial Select Sector SPDR (XLI). An increase in production and new orders would also significantly benefit companies in the transportation and logistics businesses due to the trickle-down effect that increased manufacturing activity generates. The top holdings in XLI include railroad companies such as Union Pacific Corp. (UNP) and United Parcel Service Inc. (UPS).

An increase in the manufacturing PMI will also imply the economy is recovering, and, other things remaining constant, interest rates could increase faster than expected. The Fed at its recent FOMC meeting has indicated that it will raise the base rate sometime between Q2 and Q4 2015. If economic data releases indicate a faster-than-expected recovery, this would push the rate increase nearer. One way investors can benefit from higher rates is by investing in floating-rate fixed income ETFs like the VanEck Vectors Investment Grade Floating Rate ETF (FLTR) and the SPDR Barclays Cap Investment Grade Floating Rate ETF (FLRN). As interest rates rise, these ETFs benefit, as their interest rates aren’t fixed but benchmarked to a reference rate and reset at periodic intervals.

To learn about a macro-economic release that has great significance for the housing sector, read on to Part 4 of this series.