Why ISM’s PMI readings increase on broad-based industry gains
Overview: Why the shift in ECB’s rate increases Treasuries (Part 2 of 5)
Institute for Supply Management Purchasing Managers’ Index—manufacturing
The Institute of Supply Management (or ISM) released the manufacturing Purchasing Managers’ Index (or PMI) for May on Monday, June 2. The initial PMI reading was revised after its initial release, due to the use of an incorrect seasonal factor caused by a system error. Initially, the PMI was reported as 53.2%—indicating a slower growth rate in manufacturing compared to April’s pace. However, once the ISM realized the error, it revised the PMI reading and released it the same day.
The revised PMI reading for May, came in at 55.4%—slightly ahead of the 54.9% clocked in April. This indicated that the manufacturing sector had expanded at an increasing rate in May compared to April. May was also the 12th consecutive month recording an increase in manufacturing activity. Markets, that had moved downwards following the initial PMI reading, started to increase after the ISM released the revised report, with both the Dow Jones Industrial Average (DIA) and the S&P 500 Index (VOO) trending higher. DIA and VOO have investments in industrial conglomerate General Electric (GE). However, U.S. Treasuries posted declines on June 2, the day of the ISM-PMI release, with yields for 30-year Treasuries increasing by five basis points to 3.38%. 7–10 year Treasury (IEF) yields increased by six basis points to 2.54%, while 3-year Treasury (SHY) yields increased by four basis points to 0.83%.
Key takeaways from ISM’s Manufacturing PMI
The PMI’s critical components of Production and New Orders registered growth at an accelerating rate, while employment growth was slower in May. Prices of raw materials increased at a faster rate, while inventory levels were reported as being too low. A supply crunch could lead to inflationary pressures. 17 out of the 18 reporting industries, showed growth in May, led by Furniture and Related Products.
Bradley J. Holcomb, CPSM, CPSD, chair of the ISM Manufacturing Business Survey Committee stated, “The past relationship between the PMI® and the overall economy indicates that the average PMI® for January through May (53.7%) corresponds to a 3.5% increase in real gross domestic product (or GDP) on an annualized basis. In addition, if the PMI® for May (55.4%) is annualized, it corresponds to a 4% increase in real GDP annually.”
ISM’s PMI—non-manufacturing
ISM released the services PMI report for May on Wednesday, June 4. The services PMI reading for May, was reported at 56.3% ahead of consensus estimates of 55.3%, and also higher than the 55.2% recorded in April. This was the 52nd consecutive month in which the services sector activity expanded. The acceleration in the rate of growth was largely due to the Business Activity, New Orders, and Employment Indices, which grew at a faster rate compared to April. The prices index also grew at a faster rate, compared to April, which may lead to higher inflation. 17 out of the 18 reporting industries grew in May, with construction growing the most. Mining was the only industry that reported a contraction.
What is the PMI?
In general, the PMI is a composite measure of economic activity. The PMI is based on surveys of a cross-section of private sector companies, that may be selected based on objective economic criteria, such as revenue contribution to industry sales, industry contribution to GDP, etc.
Headline PMI readings are usually issued for the manufacturing and service sectors. In turn, these indices are composed of a number of diffusion indices that give a measure of a particular economic activity (for example—employment, new orders, deliveries, etc.). Index readings are expressed on a scale of 0–100, with a reading above 50 implying that business activity has expanded month-on-month (or MoM), while a reading below 50 implies contraction. A reading of 50 is a neutral reading and would mean business activity has neither expanded nor contracted.
In the next section, we’ll discuss the manufacturing and services sector PMI readings released by Markit Intelligence. Please continue reading the next section of this series.
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