Why external factors affect ISM’s purchasing managers’ index

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Nov. 26 2019, Updated 12:44 a.m. ET

The Institute for Supply Management’s (or ISM) purchasing managers’ index (or PMI) release

The ISM will release the manufacturing PMI for August on September 2. The PMI is a composite measure of economic activity. It’s based on surveys of private-sector firms. These are selected based on economic criteria, like revenue contribution to industry sales or industry contribution to gross domestic product (or GDP).

Headline PMI readings are composed of several diffusion indices measuring specific activity, like employment or new orders. Index readings are reported on a scale of 0 to 100. A reading over 50 implies a month-over-month expansion in business activity. A reading below 50 implies contraction.

Investor impact

The PMI report can significantly move markets. It’s keenly watched by analysts and economists, as it’s one of the timeliest manufacturing activity indicators.

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Manufacturing sector expansion generally proves bullish for stocks, especially those in the industrials sector. Stock market ETFs that are broad-based or have an industrial slant—like the SPDR Dow Jones Industrial Average ETF (DIA), the State Street SPDR S&P 500 ETF (SPY), the Vanguard S&P 500 ETF (VOO), the SPDR S&P MidCap 400 (MDY), and the iShares Russell 1000 Value ETF (IWD)—generally benefit from a positive PMI report.

Highlights from the July release

  • The PMI reading came in at 57.1% in July, the highest since April 2011. A month-over-month increase in PMI implies accelerating growth.
  • The critical employment and new orders components of the PMI led the increase.
  • Seventeen out of the eighteen industries reported growth in July.

Outlook

The U.S. manufacturing sector grew for the 14th consecutive month and the economy grew for the 62nd consecutive month in July. Based on the historical PMI-GDP growth relationship, the average PMI between January and July corresponded to a 3.7% annualized growth rate in real GDP. Based on current momentum, manufacturing growth should continue.

However, there could be lower growth reported in some high-tech industries due to external factors—like the sanctions on Russia and tensions in the Middle East. The export component would be affected. This may adversely impact the PMI.

In the next part of this series, you’ll read about the PMI release by Markit Intelligence.

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