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Manufacturing Expands at a Faster Rate, Drives Demand for Loans

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Manufacturing index

The manufacturing PMI (purchasing managers’ index) for May was released on June 1, 2015. The PMI reading increased to 52.8%. The PMI index was at 51.5% in April. May was the 29th month in a row recording a PMI reading greater than 50%. A reading above 50% indicates that the manufacturing economy is generally expanding.

The index rose in May after a stable reading in April. The growth in May indicates that the growth rate of the manufacturing economy was higher than what it was in April. The above chart shows the monthly PMI readings over the last year.

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Inventories start growing

The new orders index increased, indicating more new orders, which is of course positive for the overall economy. The production index declined from April’s reading. Yet at 54.5%, it still indicates growth in production, albeit at a slower rate.

The inventories index increased to 51.5% in May, indicating growing inventories. Inventory levels indicated the opposite in April when the index fell below 50%. Rising inventories may indicate reduced demand—a negative sign for economic growth.

At the same time, inventory growth accompanied by growth in new orders and production may indicate that businesses are positive about the economic outlook. Inventory growth drives demand for commercial and industrial loans. This indicator seems to be moving in the right direction to support loan growth at banks.

Impact on banking sector

When manufacturing expands, it’s a positive indicator for overall economic growth. Generally, it results in positive GDP (gross domestic product) growth. As the economy grows, the demand for loans increases, income levels rise, and defaults on loans decrease.

Banking sector companies, including J.P. Morgan (JPM), Wells Fargo (WFC), Citigroup (C), and Bank of America (BAC), as well as the Financial Select Sector SPDR Fund (XLF), will benefit from a growing economy. Combined, these four banks make up ~27% of XLF.

Economic growth also benefits regional banks such as Regions Financial (RF), SunTrust Bank (STI), and KeyCorp (KEY).

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