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Why improving new orders boost manufacturing stocks and ETFs

Surbhi Jain

Watch for these key indicators ahead of the July 4th weekend (Part 3 of 8)

(Continued from Part 2)

Dallas Fed Manufacturing Survey

The Dallas Fed conducts this monthly survey of manufacturers in Texas regarding their operations in the state. The survey asks participants for their opinions on changes in certain manufacturing indicators over the previous month and their expectations for activity six months into the future. The break-even point for each index is zero. Positive numbers show growth and negative numbers show a decline. The Dallas Fed Survey gives you a detailed look at Texas’ manufacturing sector, how busy it is, and where it’s headed.

The production index saw a decline from a 24.7 in April to 11 in May. The business activity index also dipped from the 11.7 reported in April to 8 in May. The reading for June is scheduled for Monday, June 30.

PMI Manufacturing Index

Markit Economics’ release of its Purchasing Managers’ Manufacturing Index, or PMI, for June is scheduled for Tuesday, July 1. Markit’s U.S. Manufacturing PMI is based on monthly surveys of a selected panel of over 600 companies from all areas of U.S. manufacturing activity.

The flash or indicative index for June came in at 57.5 versus 56.4 in finalized May and 56.2 for the May flash. New orders led June’s flash report, where improvement in backlog orders was particularly strong. These readings point in the months ahead to a rising output rate.

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.

Factory orders

The Bureau of the Census, U.S. Department of Commerce, releases its monthly factory orders report for May on Wednesday, July 2. Factory orders represent the dollar level of new orders for both durable and non-durable goods. The data show how busy factories will be in the coming months as manufacturers work to fill those orders.

Factory orders rose higher than expected to 0.7% in April. This is the latest sign of strength in the manufacturing sector.

This report gives you insight about demand for not only hard goods such as refrigerators and cars but also non-durables such as cigarettes and apparel. In addition to new orders, analysts monitor unfilled orders. These are an indicator of backlogs in production. Shipments reveal current sales. Inventories give you a handle on the strength of current and future production. All in all, this report tells you what to expect from the manufacturing sector—a major component of the economy and so a major influence on your investments.

The manufacturing sector is well supported by the service sector, which accounts for more than three-quarters of the U.S. GDP, according to the World Bank. The service sector drives economic activity and growth. Let’s see what key releases help gauge the performance and activity of the service sector in the U.S. in the next part of this series.

Continue to Part 4

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