Watch for these key indicators ahead of the July 4th weekend (Part 2 of 8)
The Institute for Supply Management (or ISM) was the first supply management institute in the world. ISM aims to enhance the value and performance of procurement and supply chain management practitioners and their organizations worldwide. As part of its mission, ISM releases monthly reports that gauge economic activity in the manufacturing sector. These include the Chicago Business Barometer, which summarizes current business activity. This report is also known as the Chicago Purchasing Managers’ Index, or Chicago PMI. Another of these key releases is the ISM Manufacturing Index.
Chicago Business Barometer
ISM Chicago compiles a survey and a composite diffusion index of business conditions in the Chicago area to reflect the overall economic activity in the area. Readings above 50 indicate an expanding business sector. The report serves as a proxy for U.S. economy’s overall manufacturing health.
The report is commonly referred to as “the Chicago PMI.” But the report’s official name is ISM Chicago. PMI is short for “purchasing managers’ index.”
The Chicago PMI for May was very strong. The index reached 65.5 versus 63.0 in April. But consensus prediction for June is 64.0. The reading for June is scheduled to release on Monday, June 30.
The ISM manufacturing composite index
The ISM manufacturing composite index is a diffusion index. It’s calculated from five equally weighted components from a monthly survey of purchasing managers at roughly 300 manufacturing firms in the U.S. The survey asks purchasing managers about the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. The five components of the composite index are:
- New orders
- Supplier deliveries
- Inventories (their own, not customer inventories)
The ISM manufacturing data gives you a detailed look at the manufacturing sector, how busy it is, and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on markets. A healthy manufacturing sector is indicated by a rising ISM index. A rising index bodes well for corporate earnings and is bullish for the stock market. But the bond markets tend to fall when the ISM manufacturing index is stronger than expected on inflation expectations.
Industrial ETFs include the SPDR Industrial Select Sector Fund (XLI), which has companies like General Electric Co. (GE) and Boeing Co. (BA) in its portfolio, the Vanguard Industrials Index Fund (VIS), and the iShares Dow Jones US Industrial Sector Index Fund (IYJ). These ETFs are good indicators for the industrial sector.
Outlook for the coming reading
For May, ISM reported its PMI at 55.4 versus the 54.9 it posted in April. Consensus expectations for June stand at 55.6, backed strongly by good growth in new orders. The reading for June is scheduled for Tuesday, July 1.
The next part of this series talks about the other key manufacturing sector releases scheduled for the week ahead. To understand the effect PMI readings have on markets, please see Why do key purchasing managers’ index readings move markets?
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