Regional Manufacturing Indexes Point to a Stronger ISM Manufacturing PMI

The Institute of Supply Management’s Purchase Managers Index data is one of the most widely watched indicators. It is considered to be a leading indicator which gauges the strength in the U.S. manufacturing sector. Increased activity in the ISM’s manufacturing PMI typically leads consumer and producer price index alike as well as influencing employment.

Economists forecast an ISM print of 53.5, slightly higher from November’s 53.2, which looks a bit conservative and opens the risk to an upside surprise on the actual data.

The regional manufacturing index data such as the Empire State Manufacturing index, Philly Fed Manufacturing Index, Richmond Fed Manufacturing index and so on are usually volatile on a month to month basis. However, they tend to lend support to the broader looking ISM manufacturing PMI.

In November, the ISM manufacturing PMI rose to 53.2, beating
estimates of 52.1 and increased from October’s headline print of 51.9. It was the fastest expansion seen in five months. A reading above 50 indicates expansion in the manufacturing sector. Within the survey, 11 out of 18 sectors posted growth. These included petroleum, paper, plastics, computers and electronics, rising the most since July 2016.

The ISM’s report for November said “The November PMI® registered

53.2 percent, an increase of 1.3 percentage points from the October reading of 51.9 percent. The New Orders Index registered 53 percent, an increase of 0.9 percentage point from the October reading of 52.1 percent. The Production Index registered 56 percent, 1.4 percentage points higher than the October reading of 54.6 percent. The Employment Index registered 52.3 percent, a decrease of 0.6 percentage point from the October reading of 52.9 percent.”

The positive beat on the data was supported by the regional manufacturing surveys. During the period, the Empire State manufacturing index rose to 1.5 after contracting to -6.8. The Philly Fed manufacturing index slipped slightly to 7.6 from 9.7, while the Richmond manufacturing index rose to 4, offsetting the previous month’s decline of -4. Finally, the Chicago PMI posted strong growth, rising to 57.6 from 50.6 a month ago.

Looking ahead to the December’s data from the ISM, the Philly Fed manufacturing index rose to 21.5, accelerating from the modest decline in the previous month. The Empire state manufacturing index also grew as the index rose to 9.0 while the Richmond manufacturing index rose to 8.

Within the regional manufacturing data, new orders and shipments rose sharply across the board, which is seen as a key factor in pushing the ISM’s new orders sub-index higher as well. In November, the index of orders improved to 53.0 from a month ago. However there are some weaknesses in the regional indexes as well. Employment in the manufacturing continued to remain weak in December.

Despite the weakness in the employment sub-index the overall growth from the regional manufacturing indexes show that growth is accelerating. The manufacturing sector in the U.S. was in a steady decline since 2014 and has managed to turn around with the increase in activity even more accentuated since 2016.

A positive ISM manufacturing PMI will no doubt help to boost the U.S. dollar in the short term. The data comes ahead of this Friday’s non-farm payrolls data and could potentially set the sentiment in the markets this week. A positive beat on the expectations will no doubt keep the prospects of the Fed rate hikes this year. The Federal Reserve has signaled three rate hikes over the course of the year which will only be strengthened on a stronger ISM manufacturing PMI print.