ISM Purchasing Managers’ Index : Definitive Guide 2017

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How To Use Economic Indicators To Find Profitable Investment Opportunities & Increase Your Returns

This Guide Has Practically Everything You Need To Know About The MOST IMPORTANT and RELIABLE Leading Economic Indicator, The PMI/ISm Manufacturing Index.

So If You Want to Learn How To Understand & Use This Powerful and Influential Economic Indicator to Generate Profits and Make Money Investing, You Came to The Right Place.

You will learn How To Make Forecasts, Explore Economic Trends and Position Yourself Accordingly to Make Money Investing & Trading.

Here are some questions you will be able to answer after reading it:

Make Sense of The Purchasing Manager's Index.

How To Read, Interpret and Utilize This Data

How It Impacts Impacts Financial Markets

Which Industries and Stock Sectors  Should You Buy or Avoid.

Global Macroeconomic Analysis

The Institute of Supply Management Manufacturing Report on Business (ROP) & Purchasing Managers Index (PMI)

The ISM Index

The Most Important & Useful Economic Indicator For Investors & Traders

The manufacturing PMI is a survey of manufacturing firms conducted by the Institute for Supply Management.

The ISM is a non-profit institution with about forty thousand members in various segments of the business world. The ISM PMI is released on the first business day of each month.

Without a question, The ISM Purchasing Manager's Index or PMI , is one of the most Important, reliable and useful leading economic indicators for investors and traders due to its reliability and timing.

The ISM  provides excellent information on overall growth or decline in business activity and pricing pressures across the US economy.

The vendor performance - Percent of Purchasing manager slower deliveries - is less volatile than all other indexes and provides very good indications of patterns in the business cycle.

The Business Cycle is an Important Tool For Global Macro Investment Managers.

It is an integral part of Idea Generation Processes Globally.

As Global Macro Fund Managers control large pools of funds, anything that impacts their opinions has an impact on financial markets.

The ISM index can draw a good picture of future economic development -  6 to 12 months time - allowing investors and traders to generate ideas based on recent developments with future implications.

The Survey

Each month the ISM institute sends a questionnaire to about 400 of its members asking for their answers on a number of questions about different aspects of business management.

Their answers to these questions allow The Institute to generate the ISM manufacturing index.

The Members group consists of 300 to 400 very large US Multinationals and business concerns.

In Particular, they are asked to identify month-over-month changes for the index.

The ISM ROB/ PMI is very important due to the fact that their activities represent 20% of the US GDP.

They provide an accurate picture and a true reflection of economic activity.

The manufacturing data has more value to traders due to the length and reliability. The Manufacturing data has been tracked since 1947. The consumer data has been tracked since mid 70's, therefore, the reliability and weight of manufacturing data is superior.

Participants then respond to each question posed with a simple “yes” or “no”, and their answers are then compounded into a value between 0 and 100, in a diffusion index.

  1. If for any question the value of the index is above 50, we understand that there was a larger number of positive responses than negative ones. If the value is below 50, then negative responses were dominant.
  2. If the value of the index is 50, the implication is that there was an equal number of affirming and negating responses

Below an Extract of the January 2017 

WHAT RESPONDENTS ARE SAYING …

  • “Demand very steady to start the year.” (Chemical Products)
  • “January revenue target slightly lower following a big December shipment month.” (Computer & Electronic Products)
  • “Strong start to the new year. Production is increasing and we are adding capacity.” (Plastics & Rubber Products)
  • “Business looks stronger moving into the first quarter of 2017.” (Primary Metals)
  • “Economic outlook remains stable and no current effects of geopolitical changes appear to be penetrating market conditions.” (Food, Beverage & Tobacco Products)
  • “Sales bookings are exceeding expectations. We are starting to see supply shortages in hot rolled steel due to the curtailment of imports.” (Machinery)
  • “Year starting on pace with Q4 2016.” (Transportation Equipment)
  • “Business conditions are good, demand is generally increasing.” (Miscellaneous Manufacturing)
  • “Conditions and outlook remain positive. Raw material prices are stable resulting in stable margins. Asset utilization remains high.” (Petroleum & Coal Products)
  • “Steady demand from automotive.” (Fabricated Metal Products)

U.S. Manufacturing PMI

In general markets attach a greater degree of importance to the direction of change over the absolute value of the indicator.

For example, although both 53 and 57 indicate an expanding manufacturing sector, the latter being followed by the former would be seen as a disappointment because of the inference that the economy is growing with a slower speed than previously.

Here is a brief summary for ISM manufacturing index readings:

ISM above 50 and growing: Long Bias on economy and stocks

ISM above 50 and slowing: Long yet weak bias. This signs neutrality and depending on the pace, a reason to be Flat.

ISM below 50 and slowing: Short Bias, looking for weakness in Stocks.

ISM below 50 but advancing: Short bias still dominant, signing recovery and a turn.

ISM high reading above 50 and peaking with high reading above 70's: Time to start to reduce exposure.

ISM below 50 but trough with reading below 40: That is when one could start to look for opportunities. The economy may be recovering and one should exploit the opportunities.

REPORT SUMMARY JANUARY 2017

MANUFACTURING AT A GLANCEMANUFACTURING 
January 2017
Index Series Index

Jan

Series Index

Dec

Percentage

Point

Change

Direction Rate of Change Trend* (Months)
PMI® 56.0 54.5 +1.5 Growing Faster 5
New Orders 60.4 60.3 +0.1 Growing Faster 5
Production 61.4 59.4 +2.0 Growing Faster 5
Employment 56.1 52.8 +3.3 Growing Faster 4
Supplier Deliveries 53.6 53.0 +0.6 Slowing Faster 9
Inventories 48.5 47.0 +1.5 Contracting Slower 19
Customers’ Inventories 48.5 49.0 -0.5 Too Low Faster 4
Prices 69.0 65.5 +3.5 Increasing Faster 11
Backlog of Orders 49.5 49.0 +0.5 Contracting Slower 7
New Export Orders 54.5 56.0 -1.5 Growing Slower 11
Imports 50.0 50.5 -0.5 Unchanged From Growing 1
OVERALL ECONOMY

Manufacturing Sector

Growing Faster 92
Growing Faster 5

Manufacturing ISM® Report On Business® data is seasonally adjusted for the New Orders, Production, Employment and Supplier Deliveries Indexes.

*Number of months moving in current direction.

Indexes reflect newly released seasonal adjustment factors.

ISM Overview

We will take a closer look at each single piece of the manufacturing index, but before that we’ll make a few general remarks about its usefulness and meaning.

First of all, the series is one of the oldest in existence, with reports stretching all the way back to 1931, to the Great Depression era.

Data in the ISM’s release sheds light on the economies performance in such severe circumstances as the Vietnam War, the oil crisis and high inflation of the 1970s, the boom years of the 1960s, and of course the stock market bubble at the beginning of the new millennium.

As such, the series provides a rich and reliable data mine for analysts and traders desiring to make sense of the various confusing developments in the economy.

Industry Sentiment

As an indicator of manufacturing industry sentiment, the PMI is second to none. Its various components are closely watched by the market and traders, and also by the Federal Reserve.

It is not unusual to see references to information provided by it in the minutes of FOMC released after the Federal Reserve’s meetings. In addition to providing data on actual production, new orders, price pressures, and inventories, the PMI is also a confidence indicator.

Indeed, many analysts attach greater interest to inventory numbers and new orders than actual production results to gauge sentiment and gain some guidance on future trends.

Since the answers given by managers reflected perceptions as much as they reflect reality, traders can use the PMI number as a sentiment indicator.

We can see the manufacturing PMI as the equivalent of the various consumer confidence surveys for the business sector.

The stock market concentrates on the new orders component to gauge the dynamism of the manufacturing sector, while the bond market is exceptionally attentive to prices paid, supplier deliveries, and inventory numbers.

If these numbers indicate capacity constraints, price pressures can be expected to materialize, and in response the Federal Reserve may raise rates, which leads to rising yields and falling bonds prices.

Stock and bond markets react strongly to unexpected PMI releases, and some major readjustments in market positioning may occur if the results lead to a significant shift in perceptions about the future.

All these events have their usual reflection in the currencies market, leading to rapid movements and turmoil if the PMI result leads to a significant shift in perceptions.

We’ll take a deeper at this subject while examining the components of the ISM report.

Parts of the PMI release are used by the government and private institutions in their reports on various aspects of the U.S. economy.

The supplier deliveries index, for instance, is used by the Conference Board in the construction of its U.S. leading index.

The PMI is also used by many analysts and economists for estimates of future GDP releases.

As of 2009, a manufacturing PMI in excess of 41.2 corresponds to overall GDP growth for the entire U.S. economy.

Thus, for example, at 43, the manufacturing sector would be contracting significantly while the overall economy would be growing at a relatively slow speed. If the number is below 41.2, a recession, or at least a temporary contraction in output would be suspected.

So far we have taken a general look at the manufacturing report,

Now we’ll examine the various components of the release, discussing the significance of each piece, and its meaning for the fundamental analysis.

Performance by Industry or Qualitative Statements

This section of the ISM report breaks down U.S. industries into three groups based on their overall responses about growth. The eighteen industries as divided by the ISM are: Nonmetallic Mineral Products;

  • Paper Products;
  • Printing & Related Support Activities;
  • Electrical Equipment, Appliances & Components;
  • Transportation Equipment;
  • Chemical Products, Machinery;
  • Plastics & Rubber Products;
  • Wood Products;
  • Textile Mills;
  • Miscellaneous Manufacturing;
  • Furniture & Related Products;
  • Computer & Electronic Products;
  • Food, Beverage & Tobacco Products;
  • Fabricated Metal Products;
  • and Primary Metals.

ISM & Stock Sector Performance

This brief part is mostly useful to stock traders as it gives an idea on how the various industry groups are faring on a general basis.

Currency and commodities & Futures traders can identify possible trends in commodities and commodity currencies on the basis of what is reported by the various ISM industry groups.

For example, since the U.S. is importing a lot of forestry products from Canada, contraction in the paper products, wood products, furniture and related products categories can mean that the Canadian economy may face some difficulty, and the Canadian currency may suffer as a result.

Needless to say, other variables must also be taken into account, but the ISM release may confirm the signals generated by other indicators and reports on commodity demand in the global market.

In the same section, the ISM provides some anecdotes on manager responses to questions about general performance.

The most striking answers are listed in a simple form to illustrate the attitudes of industries to current conditions.

This brief part is especially useful on gauging the sentiment of Corporate America, as numerical values may not always be able to present the full picture clearly.

Let's see the following example:

  • After a few months of contracting by 42-44, the markets may be excited to see a release at 47, interpreting it as a sign that the manufacturing sector is regaining its health. However, if the picture of slower contraction is not confirmed by anecdotes, and sentiment, there is little justification for much optimism. In short, it is a good idea to confirm a turnaround in the economy with a reversal in management sentiment and anecdotal data.

The performance by industry section is concluded with a summary list of the various sections of the PMI report, which provides the current data, the numbers of the previous month, and percentage change in value, in addition to indicating the direction, rate, and length of the change in existence.

The duration component of the table is exceptionally useful for understanding the severity and depth of any trend in the manufacturing sector.

A sustained trend lasting over many months is indicative of stronger dynamics, and will take longer to be resolved or negated by economic events.

ISM & Commodity Prices

The commodity prices part of the ISM report reports on rising or falling prices of commodities, and items in short supply, if there is any.

Each commodity is accompanied by a number indicating the number of months during which it has been reported to be in short supply.

For instance, the item “copper(2)” indicates that copper is reported to be in short supply for two consecutive months. As such, the numbers are a sign of the severity of shortage or glut existing for a commodity in the U.S. Market.

Traders can use this section to confirm the results of the previous part.

For example, if the performance by business section is reporting wood products to be in short supply, and the commodity prices part notes that pulp or wood prices are rising, there is a sign that at least in the short term businesses supplying these goods will find ready clients for their products. And the opposite is also true.

Stock market traders can use this information to buy or sell an industry group on the basis of market factors.

Currency traders can examine the import relationship of the U.S. with its trading partners (for example, by checking data provided by the commerce department), and gain an idea on which commodity producers are likely to benefit in the long term.

We should mention that the reactions in the currency market are not always strongly correlated to the actual supply and demand picture of commodities, even for nations like Australia or South Africa.

Other factors such as risk perception, political conditions, and the phase of the business cycle play a significant role in establishing currency trends, and can, in time, negate the guiding value of trade dynamics.

PMI

The headline number is examined in this section in greater detail.

The PMI value is significant for a number of reasons. It is a timely advance release on the future GDP numbers to be realized. It is a widely watched sentiment indicator for the manufacturing sector. It is a crucial release on a time series stretching back to the 1930s. And finally, it is a widely anticipated piece of data for the stock, commodity, bonds, and currency  traders.

Although the PMI number itself is just the weighted average of the other components examined separately, and as such, does not provide any additional light on the state of the economy by itself, it is valuable indicator on the overall health of the American economy.

This section compares the current PMI release with that of the previous month, states the corresponding GDP number to be anticipated, and then provides a table stating the PMI numbers of the previous twelve months.

We discussed the significance and use of the PMI number itself in previous chapters.

New Orders

The PMI data is followed by the responses of managers to questions about the state of new orders in the U.S. economy.

A number greater than 50 indicates that new orders are piling up, while a number less than 50 means that orders are dwindling. How big the number is relates to the speed at which new orders are accumulated.

For example, new orders falling from 56 to 51 means that orders are rising, but at a slower speed. By contrast, the index rising from 42 to 46 implies that new orders are still diminishing in number, but at a slower speed than before.

The report then groups the 18 industries according to the growth of new orders in each of them, followed by a table showing the values of the new orders index during the past four months.

The new orders component is one of the most important parts of the ISM Report on Manufacturing. Many traders regard the new orders number as an advance indicator on the state of the U.S. economy. The PMI number, the data on present production all are timely and recent, but still provide information on the past month, and are more or less reflected in the prices. However, the data on new orders is forward looking in that the observed rise or fall in new orders is going to be reflected in actual production, and consequently GDP statistics in time. It is safe to say that the new orders data is the leading indicator of the PMI release.

Stocks traders use the new orders data to establish the ongoing trends in various segments of the U.S. manufacturing industry.

Rising new orders in a single month probably is not indicative of much in terms of trends.

However a rise or fall established over a number of months and maintained can easily be regarded as a sign of ongoing dynamism in a sector of the economy.

Traders sometimes use the new orders release as a guide to help establish the most dynamic sectors of the economy.

Bond and currency traders are not exceptionally concerned with the sectorial breakdown of the new orders release, but use the data in conjunction with other information provided by the PMI release to gauge the future direction of inflation.

Depending on how high or low inflation is expected to be, the U.S. currency is expected to appreciate or depreciate against its peers.

That is why it is important to select an Investment philosophy that match one personality. An investment philosophy that matches our personal philosophy can help us deal with adversity in other areas of life.

Following a philosophy you trust will help you to stay disciplined. One of the most important aspects of investment is discipline.

By better understanding markets, having realistic expectations and feeling comfortable with uncertainty, one can achieve excellent results.

Discipline and confidence will allow you to relax in the knowledge that you are well positioned to participate in capital market returns over time.

Production

The new orders data is followed by some numbers relating to current production levels in the U.S. manufacturing sector.

It is important to note that the ISM Production Index correlates closely with the Federal Reserve’s Industrial Production numbers released each month. As such it can be regarded as an advance release for the eventual un-revised figures coming from the Fed in the same month.

As of 2009, an ISM Production Index above 50.4 is consistent with an increase in the Fed’s industrial production numbers.

This section breaks down the responses of the eighteen industries into three groups of better, same, and worse, and also provides a table on the progression of the PMI value over the past four months.

Traders take note of the production index in order to gauge the current status of the manufacturing sector.

This number is the sharpest and most precise indicator on the present health of manufacturing, even more so than the PMI, however, it is also backward looking and of limited value for predicting future trends.

As previously mentioned, traders regard it as an advance release on the Industrial production numbers of the Federal Reserve, but in general, market reaction is not as significant as it is to the other components of a release.

The Production PMI can be used to capture the bottom of a recession, in conjunction with employment data and forward looking indicators.

Production

ISM®’s Production Index registered 61.4 percent in January, which is an increase of 2 percentage points when compared to the seasonally adjusted 59.4 percent reported for December, indicating growth in production for the fifth consecutive month. An index above 51.4 percent, over time, is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures.

The 10 industries reporting growth in production during the month of January — listed in order — are: Miscellaneous Manufacturing; Apparel, Leather & Allied Products; Paper Products; Petroleum & Coal Products; Plastics & Rubber Products; Transportation Equipment; Chemical Products; Machinery; Food, Beverage & Tobacco Products; and Computer & Electronic Products.

The five industries reporting a decrease in production during January are: Wood Products; Textile Mills; Nonmetallic Mineral Products; Electrical Equipment, Appliances & Components; and Furniture & Related Products.

Production %Better %Same %Worse Net Index
Jan 2017 32 50 18 +14 61.4
Dec 2016 28 55 17 +11 59.4
Nov 2016 26 57 17 +9 55.6
Oct 2016 25 56 19 +6 54.4

Supply Deliveries

One of the most important pieces of information in the ISM release, the supplier deliveries data provides information on how delayed the deliveries of suppliers to manufacturing firms was during the period covered by the report.

It is exceptionally important for bond traders, and also for the Federal Reserve, and by extension, to forex and stock traders.

One of the best indicators of future inflation in any economy is the output gap, which is the difference between the actual and potential performance of an economy.

If firms are running at full capacity, the output gap will shrink, and lead to strong inflationary pressures, as firms scramble to hire new labor, and have to raise wages as a result. In addition, as supply lags demand, prices are likely to rise.

All this leads to inflationary pressures, and may in time cause the Federal Reserve to raise rates.

The ISM supplier deliveries index captures a snapshot of these pressures. If suppliers are delivering goods at a faster pace than in the previous month, it is likely that capacity constraints are shrinking, the order backlog is falling, and commodity prices and the prices of intermediate goods will fall in time.

Conversely, if suppliers are delivering goods at a slower pace, it is possible that some firms have to wait a while before they are fully supplied, which may lead to the prices of some goods rising in the medium term. An index value below 50 indicates that deliveries are faster, while a value below 50 shows that deliveries are slower.

In this section the ISM report breaks the eighteen manufacturing industries into the three groups of slower, same, and faster, and complements the picture with a table showing the progression of this piece of data over the past four months.

Forex traders will usually react to the supplier deliveries number after seeing the reaction of traders in other markets, since the number itself does not directly lead to excess or deficiency of a currency in the short term.

However, as bonds rally, or are sold-off, the U.S. dollar reacts by appreciating or falling in value against other currencies.

This reaction is often simultaneous (as traders sell bonds, they also sell the U.S. dollar, but they may instead choose to buy stocks) but short term reactions are hard to predict, as usual.

In sum, the most important aspect of this item in the PMI release is its role as an inflation indicator.

Traders will buy or sell the dollar, and the carry trade pairs, while refining their long-term fundamental picture upon receiving this piece of data.

It is a good idea to consider the supplier deliveries, inventories, and customer’s inventories data together in order to gain an understanding of price pressures in the market.

Inventories

The next item in the ISM manufacturing PMI is the inventories release. This item measures the status of inventories at manufacturing firms themselves.

A number below 50 indicates contracting inventories, and the lower the number, the faster the speed of contraction. By contrast, a number above 50 indicates a rising level in inventories, and the higher number, the faster the pace of inventory buildup.

As with the other sections, the inventory index is accompanied by a breakdown of the various industries in the U.S. according to the state of inventories, that is, whether inventory levels are higher, same, or lower compared to the previous month.

The data is accompanied by a four-month chart showing historical progression of releases.

How do we evaluate the inventories data? Unlike the other items in the release, interpreting the inventory index can be a bit confusing. Inventories can contract for two reasons:

  1. if consumers demand too much of a product, the firm may not be able to meet demand, and may instead choose to sell its stocks. If stocks cannot be replenished at the speed of consumption, falling inventories is the result. This is clearly a situation where demand drives the inventory trends, and it is inflationary: we can expect prices to rise due to high demand, and the Federal Reserve to raise rates, leading to currency appreciation.
  2. In the other case, demand is low, and the firm wishes to get rid of its stocks as soon as possible because it fears that prices will fall. In this case, production is reduced, prices undergo discounts, and inventories figures fall as the firm replenishes stocks at a slower rate than consumption. This is a situation where supply is driving the trends, and can lead to deflation or disinflation. If the Federal Reserve responds by cutting rates, the dollar could depreciate.

The inventory figure also corresponds with the inventory section of the GDP release. To be precise, an inventory index higher than 42.6 is thought to correspond with a rise in inventories as reported by the GDP data of the Bureau of Economic Analysis (BEA).

Customers Inventories

The final item in the trio relating to inflationary pressures and inventory accumulation is the data on customer inventories.

As in the previous two sections, a number above 50 corresponds to rising inventories, while a value below 50 indicates that inventories are contracting.

Upon reporting on the general status of manufacturing firms’ customers’ inventories, the report breaks it down on a sectorial basis, accompanied by historical data on the past four months.

The inventories and supplier deliveries indices, discussed above, define supply and demand pressures at manufacturing firms themselves and their suppliers, such as mines, and industrial equipment manufacturers. As such, the two items above correspond partly with the PPI release.

The customer’s inventories data, on the other hand, is reflective of the supply and demand picture at a level closer to the consumer.

Since the customers of manufacturing firms are often retailers, any excess demand, or lack of it at this level has a relationship with future CPI numbers to be released.

It is important to understand the relationship between these three components of the ISM release. Suppliers’ deliveries often reflect the demand for raw materials and intermediate goods of manufacturing firms themselves.

The data on inventories reflects their own views with respect to the future performance of the economy, while the data on customers’ inventories corresponds to the opinion of the end-user.

By understanding and correctly evaluating this relationship, we construct models to reflect the future inflationary potential of the U.S. economy, and the prospects for the Federal Reserve’s interest rate policies, all of which have clear implication for financial markets in general.

Manufacturing Prices, Exporting & Importing Orders

Prices

The ISM Manufacturing Prices Index provides information on the prices charged by manufacturers. When it is higher than 50, the implication is that prices are rising, and the higher the value, the faster the rise. Conversely, a number below 50 means that the prices are falling, and the lower the number is, the faster the fall in prices.

As of 2009, a Prices Index above 47.6 corresponds with an increase in the Index of Manufacturing Prices released by the Bureau of Labor Statistics (BLS).

It is not very hard to understand what the Prices Index of the ISM corresponds to.

It simply reflects the pricing power of manufacturing firms at the time of release, and gives an accurate picture on the dynamism and health of the economy in general.

If there are identifiable trends, it is possible to evaluate the data in accordance with patterns which can help us predict future price pressures.

But a single month’s rise or fall is not of much significance, although the market can react in an unpredictable manner at times.

If the Prices Index is released with a higher than anticipated value, bonds may sell off, and the stock market may react negatively, in anticipation that the Federal Reserve will have to raise rates to restrain inflation.

But since it is possible to interpret the data more optimistically, the short-term response of the markets is probably better evaluated through technical analysis.

Export Orders

The New Export Orders Index of the ISM Report simply records the answers of manufacturing firms about the state of export markets.

Values above 50 indicate that new orders are accumulating, and the higher the number, the faster the accumulation, as usual.

A number below 50 indicates that the number of export orders are falling, and lower values indicate faster contraction.

The New Export Orders Index is valuable to stock and currency traders, but not so crucial for bond traders. A robust release on this index indicates that economic dynamism in the major partners of the United States is robust, leading to better performance at firms focused on catering to overseas customers.

Stock traders will use such a release as an indication that firms with large international operations may do well over the medium term.

Currency traders, meanwhile, will compare the current stance of monetary policy with regard to currency movements to the export dynamism established by the report, and on that basis, will try to analyze the future movements of the currency.

For example:

  • if the falling value of a currency leads to exporters doing well while other segments of the economy are performing poorly, some would anticipate the authorities to turn a blind eye to further depreciation of the currency in order to boost the activities of exporters.
  • If the price-sensitivity of exporting firms is low, on the other hand, authorities may not be very attentive to currency trends.

In the United States, the government does not have a clear currency policy, and as such, this value is unlikely to influence monetary policy in the absence of extreme conditions.

Imports

This item provides data on the imports of manufacturers.

The more active the manufacturing sector is, the greater the demand for imports of raw materials and intermediate goods.

More Specifically, it can provide guidance on the economic dynamism of the manufacturing sector, and also can give an idea for U.S. external demand, but probably the Commerce Department’s and Bureau of Economic Analysis (BEA)’s reports are better in gauging activity in this segment.

Buying Policy

Lead time is the time passing between the receipt of an order and its fulfillment, including delivery, depending on the stage in the production chain.

In this count the ISM’s PMI report provides information on the lead times of manufacturing, shedding light on capacity constraints and efficiency.

The items included are, project commitment lead time, relating to capital expenditures, maintenance, repair and operating supplies, and production lead time.

Strengths & Weaknesses

Strengths and Weaknesses

Let’s conclude by summarizing the various strengths and weaknesses of the ISM Manufacturing PMI.

Advantages of the PMI release:

A long time Series

The Manufacturing PMI is one of the oldest reports in the U.S., with a series reaching back to the Depression years.

As such, it provides great opportunities for comparison with past booms and busts, in order to understand the direction of the economy and to evaluate the depth of the phase that the U.S. is going through.

Anecdotal Reports

The ISM reports provides some useful anecdotal reports on the attitude of managers in various segments of the manufacturing industry, adding meaning and depth to the raw numbers provided.

If the industry data provides clues and leads to the possibility of an imminent & strong rebound , even the worst monthly numbers can be ignored in favor of a more bullish case.

On the other hand, if good numbers are accompanied by industry-wide pessimism, the bearish case must receive far greater emphasis than it would otherwise receive.

Timeliness

The ISM release is one of the timeliest pieces of economic information available, but unlike other such high-frequency releases, it is not very volatile, and trends lasting for 10-20 months are by no means rare.

This property of the manufacturing PMi is clearly very valuable for traders who seek to acquire a long-term vision on the future of the U.S. economy.

Coming on the first week of each month, the manufacturing PMI is eagerly anticipated both as a precursor to the subsequent non-farm payrolls release, and also for the wealth of additional information contained in it.

Role as an advance indicator

The ISM report serves as an advance indicator for GDP and industrial production releases, the non-farm payrolls release, and to a lesser extent the CPI release of each month.

But more importantly, it provides a great deal of information on the supply-demand picture for manufacturing products, shedding some light on the inflationary potential of the economy.

Disadvantages of the PMI release:

The most important disadvantage of using the PMI release as a forward-looking indicator for the Fed’s industrial production releases, and also for the GDP numbers is its limited coverage of the U.S. economy.

Since the report only examines the manufacturing sector, and as this sector is but a small segment of the wider American economy, the release is not the best tool for analyzing developments in the overall economy.  As a PMI, its answers and questionnaires are quite arbitrary.

For example, an improvement in production of just one percent, and twenty percent are both represented by the same “better” by the respondents. It may also be difficult to characterize what is good or bad for the manufacturer.

Finally, for news traders it may sometimes be the case that the previously released regional PMIs take out some of the emotional excitement of the eventual national ISM release, making trading decisions harder.

In sum, the manufacturing PMI is a valuable tool with a long series of historical data allowing easy comparison of the present with economic phases in the past.

It is beneficial for both short-term trading, if that is your inclination, and for long-term analysis of market events and economic trends.

Conclusions

Investor/trader perspective

The ISM Manufacturing Index is a valuable indicator of future economic activity on a 6 to 12 months basis. It is indeed one of the most valuable economic indicators for Traders and Investors.

The data is released monthly. We don't get daily updates and that means, we must make assessments and live with the consequences of our decisions.

Trying to use Economic indicators to time markets on a very short term basis is a courageous undertaking.

I would not try it myself, but there are always those who find ways to explore data otherwise.

Historically, there is a very High correlation between the ISM and GDP growth. ISM has an average 85% correlation with GDP growth on a 12 months base reading.

Financial markets, principally stock markets, are regarded as discounting mechanisms. Speculators use stock markets to try to explore the gaps between data and valuation of assets. Stocks are  instruments designed to generate gains, make money, exploring the expected future growth on the economy.

The ISM is a guide to overall medium/long term portfolio direction bias and market exposure.

Money managers managing large pools of funds try to explore that relationship between the ISM and GDP in order to construct portfolios to generate returns.

Professional money managers try to avoid switching positions constantly. They accept and understand that there are risks involved & nothing is perfect.

More Often than not, they will have to deal with Unpleasant situations & Unexpected Events.

Nevertheless, they generate ideas, construct scenarios - a.k.a. World View - and implement their ideas.

They construct their portfolio and manage exposure generally on a quarterly instead of monthly basis.

They may act otherwise if they sense their views and current developments are not in synch, as when very relevant data & new information comes in conflicting with their current view.

When Such reports are released, they will act and rebalance their portfolios, lower exposure or outright liquidate positions, turning to cash.

Let's Illustrate a a scenario with with the ISM report:

One single reading outside boundaries is not enough to cause major portfolio rebalancing.

Unless something dramatic happens, Professionals may wait for 3 or 4 readings before shifting bias, adjust exposure and rebalancing portfolios.

The ISM provides clues regarding possible futures earnings performance from large corporations. It helps to generate ideas and implement those ideas.

Their main goal is to be in sync with markets, not forecast turning points.

Building positions takes time, involves costs and requires skills. They are not trying to catch every turn or wave in markets.

That is impossible and they are well aware of that.

If you enjoy reading this report, please share it!

I will produce more reports such as these one, if there is interest for it by readers such as yourself.

I hope the report helps!

Thank you for reading.

Cheers

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