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PMI Index: Component Growth Impacts Banks

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Production and new orders grow

The ISM’s (Institute for Supply Management) New Orders Index was 51.8% in March. It decreased compared to the reading of 52.5% in February. It indicates a growing trend, but at a slower rate.

ISM’s Production Index was at 53.8% in March. It increased compared to 53.7% in February. This indicates growth in production for 31st month in a row. An index above 51.1%, over time, is generally found to be consistent with an increase in the Federal Reserve’s industrial production figures.

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Employment didn’t changed

ISM’s Employment Index declined to 50% in March from 51.4% in February. A reading of 50% indicates that there wasn’t a change in manufacturing employment compared to February. This is 21 months in a row with employment growth in the sector.

Slowing supplier deliveries

The delivery performance of suppliers to manufacturing organizations slowed in March. The ISM’s Supplier Deliveries Index declined to 50.5%. The index was at 54.3% in February. A reading below 50% indicates faster deliveries, while a reading above 50% indicates slower deliveries.

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Inventories are growing

The Inventories Index was 51.5% in March. It was lower than the 52.5% registered in February. An index greater than 42.9% generally indicates that raw materials’ inventories are growing.

Impact on banks

The combined effect, as captured by the PMI Index, is that the manufacturing sector is growing, but at a slower pace. The overall economy has also been growing for 70 months. The above figure shows the growth of various indices in March and the number of months they’re moving in the current direction.

A growing economy definitely benefits the banking sector, as we discussed in the last part of this series. The impact will be positive, not only for big banks but also for regional banks like PNC Financial (PNC), Huntington Bancshares (HBAN), KeyCorp (KEY), and Regions Financial (RF). It will also be positive for the SPDR S&P Regional Banking ETF (KRE).

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