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.
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.