Macro Monday 13~Purchase Managers IndexMacro Monday 13
ISM Purchasing Managers Index
The ISM Purchasers Managers Index (PMI) measures month over month change in economic activity within the manufacturing sector.
The PMI is a survey-based indicator that is compiled and released each month by the Institute for Supply Management (ISM). The survey is sent to senior executives at more than 400 companies in 19 primary industries, which are weighted by their contribution to U.S. Gross Domestic Product (GDP).
A PMI above 50 represents an expansion in manufacturing when compared with the previous month. A PMI reading under 50 represents a contraction while a reading at 50 indicates no change. The further away from 50, the greater the level of change.
According to Investopedia "ISM data is considered to be a leading indicator of economic trends. Not only does the ISM Manufacturing Index report information on the prior two months, it outlines long-term trends that have been building over time based on prevailing economic conditions".
The ISM reports are released on the first business day of each month for the month that has previously closed. Thus, they are some of the earliest indicators of current economic activity that investors and business leaders get regularly. Something to look out for next Monday 2nd October 2023.
The PMI focuses mainly on the five major survey areas;
1. Employment (20%)
2. New orders (30%) Covered in Macro Monday 6
3. Production/Output (25%)
4. Inventory levels (10%)
5. Supplier deliveries (15%)
We covered the ISM New Orders Index in Macro Monday 6 as it is the largest component of the Purchaser Managers Index making up 30% of the overall index. I will leave a link to the chart.
The Chart
The chart outlines the last 12 recessions (shaded red zones) with the PMI readings over the same period. As we are already aware above 50 on the PMI reading is expansionary and below 50 is contractionary (red thick line).
Three Main Findings
1. In 11 out of 12 recessions a PMI reading at or below 42 was established. This means if the PMI falls to 42 there is a 92% probability of a recession. At present we have not reached that level, we are currently at 47.6.
2. The PMI has bottomed 10 out of 12 times in Quarter 1 (between Jan – March) with the remaining two bottoms happening in Quarter 2 (both in May). This means that 83% of the time the PMI cycle appears to bottom in Quarter 1 with the most bottoms in January (6) with Feb(2) and May(2) in close second place.
- It’s worth noting that the bottom of the PMI cycle
may not be the bottom of a stock market cycle. If
we are forward looking then a rising PMI is positive
for the economy and markets but ideally a move
above 50 is the true signal of economic expansion
from a manufacturing standpoint.
3. The average PMI bottom to bottom cycle timeframe over the past 6 cycles is 58 months with the shortest being 37 months and the longest being 86 months. We are currently at month 38 and the average month of 58 is Jan 2025 with the max of 86 months being May 2027.
- How interesting is it that both these potential PMI
bottom dates line up with our two most frequent
PMI bottom months indicated in point 2 (January
and May).
- Interestingly according to U.S. government
research, since WWII the business cycle in America
takes, on average, around 5.5 years which closely
aligns with our 58 month (or roughly 5 year)
indication for the PMI chart. The business cycle
incorporates an aggregate of economic data such
as the ISM data, GDP and income/employment
metrics. We might cover the business cycle in more
detail on a future Macro Monday.
The ISM New Orders Index (30% of the PMI)
Similar to the ISM New Orders Index Chart (covered in Macro Monday 6) which makes up 30% of the PMI, we have not reached below the 42 level on this chart either which has provided a 100% confirmation of recession when we have had a definitive move below the 42 level historically.
For ISM New Orders if we stay below a sub 50 level on the ISM New Orders Chart for greater than 7 months it has resulted in a recession every time except for 1966 and 1995 (8 out of 10 times). We are currently 14 months below the 50 level which is unprecedented, with the new orders index nudging a little lower on the August reading from 47.3 down to 46.8.
ISM Data Release 2nd October 2023
When we receive our next ISM Data release next Monday 2nd October 2023 we can refer back to the PMI chart and the New Orders Index Chart and see how things have progressed and if we have reached and critical levels.
These charts and the others I have completed on Macro Mondays are all designed so that you can revisit them at any point and press play on TradingView and see if we are breaking new into higher or lower risk territory.
I hope they all help towards your investing and trading decisions.
Have a great Monday guys, Lets get after it!
PUKA
