- The ISM Manufacturing Index is a leading indicator that shows the health of the manufacturing industry.
- Current indications are that inflation is slowly beginning to decline.
- Investors should pay attention to key economic indicators to gauge inflation and future interest rates and adjust their portfolios accordingly.
Many investors are familiar with reports that help the Federal Reserve in shaping interest rates. Most notable is the US Consumer Price Index (CPI), but not many investors know that additional reports are available. These reports don’t get much news coverage, but they are just as important.
The ISM Manufacturing Index is one such report. Offering a wealth of knowledge when it comes to the health of the US manufacturing industry, let’s explore who is creating this report, along with the data it contains and evidence of inflation and the economy in general.
What is the Institute of Supply Management?
The Institute of Supply Management is the world’s largest non-profit professional supply management organization. Founded in 1915, it certifies, educates, and develops supply chain industry leaders. It also surveys purchasing managers’ opinions and releases the ISM Manufacturing Index.
What is the ISM Manufacturing Index?
The ISM Manufacturing Index is a leading economic indicator of the level of economic activity in the manufacturing sector in the United States. This means that the results of this report indicate or predict what will happen in the economy in the future.
The stock market is another major economic indicator. The market can rally if investors anticipate positive economic times ahead. On the other hand, they could plunge into a bear market if they expect the economy to deteriorate in the near term.
There are also lagging indicators that reveal trends in hindsight. These are the reports issued after the start of the boom or bust cycle in the economy. For example, the National Bureau of Economic Research will officially declare the US economy in recession a few months after the economy entered a recession.
In general, there are a few leading and lagging indicators that, when put together, give analysts a more complete picture of the health of the economy.
Are we heading in the right direction?
The latest set of data from the PMI as of August 2022 is a mixed bag. On the positive side, the prices paid component of the ISM manufacturing index is moving sharply lower, which is a good sign. It indicates a stronger balance between supply and demand, which benefits consumers by slowing price increases.
During the inflationary rises of the 1970s and 1980s, falling prices paid were a major indicator of lower rates of inflation. If the same continues today, we could see a pullback on the inflation front in the coming months.
The downside of the report's findings is that factory growth remains sluggish and production has slowed. There is still a bleak cloud looming over the outlook for the economy, and experts continue to debate whether the US will end up in a recession. While the consumer continues to maintain his strength, companies are cautious.
Gas prices in the United States have fallen to an average of $3,677 a gallon, down more than 25% from an all-time high in mid-June. Prices are at their lowest in six months. This is another good sign for both the consumer and the economy.
As driving becomes more affordable, people can travel more and get more money to spend on things other than gas. However, the question is whether the low prices will continue. While the fall driving season brings cheaper gas blends to manufacture, there will be cooler weather to deal with soon enough.
Global container shipping rates hit a 16-month low, down 52% from their peak. This is still four times higher than pre-pandemic levels but is moving in the right direction. For several months, demand exceeded supply as shutdown and supply chain issues caused delays. Now that the supply of goods and the demand for their shipment match, prices have fallen.
The supply chain still has a long way to go to catch up with demand in full, but the signs are that it is heading in the right direction.
What are the indicators that investors are watching?
As an investor, what indicators should you watch for evidence of the health of the economy? There are a few key indicators to look at, both leading indicators and lagging indicators.
Pay attention to the stock market, retail sales, and manufacturing activity for leading indicators. While there are others, these three give you a good foundation on how the economy is doing.
For lagging indicators, look at the US CPI, income and wages, and the unemployment rate. Again, there are others, but these will give you the clearest picture.
Understanding the data that helps the Federal Reserve form an opinion about the health of the economy is essential for investors. Although it is not foolproof, looking at the leading indicators can help you review your investment plan and make necessary changes.
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