Why REIT and homebuilder investors follow the manufacturing outlook (Part 3 of 4)
The Institute of Supply Management non-manufacturing index assesses the state of non-manufacturing business in the United States
The Institute of Supply Management (ISM) Purchasing Manager’s Index (PMI) is similar to the other regional PMI indices, but it covers the entire country. It’s the sister index to the ISM Manufacturing Purchasing Managers Index. The non-manufacturing ISM looks at various business indices, like new orders, production, employment, supplier deliveries, inventory, customer inventories, prices, backlog, exports and imports, and capital expenditures. A reading over 50 means the sector in question is generally expanding. Office REITs like Boston Properties (BXP), Kilroy (KRC), Vornado (VNO), S.L. Green (SLG), and Highwoods (HIW) are particularly affected by the services sector.
Services activity pulled back in February while the ISM manufacturing index expanded
The index showed that overall activity in the non-manufacturing sector increased for the 49th consecutive month but the pace of growth is decelerating. The manufacturing sector is outperforming the services sector. The overall index fell from 54 in January to 51.6 in February. The business activity index hit 54.6% and the employment index fell from 56.4 to 47.5. Weather might have driven the big decline in employment. Half the industries reported expansion. The best-performing sectors were utilities, other, and agriculture. Mining, arts, entertainment and recreation, and retail performed the worst. The elephant in the room, of course, will remain Obamacare and how it impacts corporate cost structures going forward.
Some key quotes from the survey:
- “The Affordable Care Act is creating significant financial uncertainty to healthcare organizations. With little warning, the negative impact on revenue has been unprecedented.” (Health Care & Social Assistance)
- “Steady—trending slightly lower.” (Finance & Insurance)
- “Economy still plugging along, but at a very slow rate of growth.” (Professional, Scientific & Technical Services)
- “Cold winter weather has had a major affect on us when compared to year-over-year.” (Wholesale Trade)
- “Winter weather is slowing down our projects; it should only be until April.” (Construction)
Browse this series on Market Realist:
- Part 1 - Rebounding manufacturing in February affects builders like Lennar
- Part 2 - Why strong manufacturing drives homebuilders like Toll Brothers
- Part 4 - Why the ISM Services report drives REITs like Boston Properties
- Professional Services