ISM's Manu- facturing Report Enthuses Market for Good Reason
Between the ISM Manu- facturing Report and the Chicago Purchasing Managers Index, not to mention gains in EU and Chinese manufacturing, and in US auto sales, it seems clear manufacturing is on the rise again. Examining ISM's data here, we get why the market is celebrating today.
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Well, that cat bounces after all. The sector that led the nation out of recession, manufacturing, which was then-strengthened by a soft dollar and the disorganization of several of America's most important unions (namely in autos), is picking up slack again. Two successive reports over the past couple days seem to show the manufacturing sector is alive and well in America. Today's motor vehicle sales data is not offering any reason to suspect anything different either.
The Institute for Supply Management (ISM) reported on the state of manufacturing for the month of January today. ISM's Purchasing Managers Index (PMI), which is a diffusion index based on the responses of industry survey participants across the country, increased to a mark of 60.8. The measurement was the best since May 2004, and marked the 18th consecutive month of expansion in the manufacturing sector (readings above 50). January also marked the sixth consecutive period of month-over-month growth, so the bounce is not newly underway, just robust enough today for the market to take notice.
ISM reported broad expansion, reaching across 14 of 18 measured manufacturing industries. When inspecting the leading industries, it becomes clear that price expansion is contributing to growth, where these prices can be transferred along the vertical line to point of sale. Petroleum & Coal Products manufacturers led all industries, with primary metals following up behind. That said, the four industries reporting contraction included some commodity component: Textile Mills; Printing & Related Support Activities; Plastics & Rubber Products; and Nonmetallic Mineral Products.
ISM measures price impact though, so we need not speculate. In fact, ISM's Manufacturing Price Index led most sub-indices in rate of expansion, as the index jumped 9 points in January, to 81.5. No commodities were reported down in price, with all the following listed as more expensive: Aluminum; Aluminum Products; Brass; Brass Products; Caustic Soda; Chemicals; Copper; Copper Based Products; Corn; Corrugated Containers; Diesel; Freight Rates; Fuel Oils; High Density Polyethylene; Lubricants; Nuts; Packaging Materials; PET; Plastics; Plastic Products; Plastic Resins; Polyethylene Resin; Polypropylene; Soybean Oil; Steel (of every sort); and Sugar. We have captained the ship that sees dangerous inflation on the horizon, but the report also offered other good signs to temporarily quench concern.
Production was reported up just slightly (0.5) to 63.5 (still strong), but New Orders gained by 5.8 points to 67.8. I have to wonder if the survey participants are answering based on quantity ordered or by order value, which would be impacted by price and inflate the feeling about this data point. That would set the market up for disappointment, since it is banking on these gains today. That said, it appears the data corresponds with the government's data on a constant dollar basis, or so ISM says. Also, the respondents reported an overwhelming improvement in order activity, with far more reporting improvement and far less reporting deterioration. Padding enthusiasm, Order Backlog switched directions in January and came out of contraction (+11 to 58) with conviction. Still, the price issue is not completely resolved by the compilation of strong sub-indices.
Manufacturing makes up a minority of the nation's production, and so its impact has to be handicapped. However, we were still glad to see the Employment Index gained 2.8 points, to 61.7 in January. While one respondent offered a cautious qualitative outlook on employment, this quantitative gain shows some tentative hiring is occurring in this minority sector. Eleven of the 18 industries measured reported increases in employment.
The President has been aggressively pushing American exports and fair trade in an attempt to restore the historical strength of our nation, industrial production. Thus, we examine the New Export Orders Index, which gained 7.5 points, to 62% in January. You can look for more gains here based on the President's push and Congressional agreement.
America is still a consumption country though, and a beneficiary of low-cost foreign labor (and of other inhumane injustices that reduce cost), and so imports may offer a more accurate assessment of general economic health. The Import Index gained as well, adding 4.5 points, to reach 55. American manufacturers are only importing more because they are selling more, both domestically and through exports of final product.
Today's ISM Manufacturing Index data point would not have as significant an impact as it is having today if not for the fact that it marks an exclamation point to a trend that extends for many months now. And it is likewise emphatic due to the historic gain in the day ago reported Chicago PMI, which increased to a level not seen since 1988. The Chicago PMI data point measures all business activity within the Chicago/Midwest area, but is seen as a broad measure for the national economy (we are not so sure we're in complete agreement on that point). Meanwhile, American carmakers reported better than expected domestic motor vehicle sales in January (+18%), led by GM (NYSE: GM) and Chrysler. For a little sweetener to the strawberries, sprinkle in today's reported gains in Eurozone and China Purchasing Manager Indexes, and you have a global community reporting economic expansion. That's a good thing, and so the market, as gauged by the Dow Jones Industrials, is up 1.2% so far today, recovering all the ground lost on recent concerns about Egypt.
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