“Davidson” submits:
The Institute of Supply Management(ISM) reported yesterday a Purchasing Managers Index(PMI) reading of 55.7%. It is useful to view this not as a single value which is often the case with media compression, but as an evolving series of related economic activities that are distilled into a single value.
- The PMI exceeded the historical level of 41.2% = Expanding Economy in May 2009
- The ISM Price Index exceeded the historical level of 47.6% = Positive Price Increases in June 2009
- The ISM Production Index exceeded the historical level of 50.4% = Expanding Production in June 2009
- The ISM Employment Index exceeded the historical level of 49.7% = Expanding Employment in Oct 2009
I call your attention to the order of when each of these series moved above their historically significant levels.
First, the PMI has the reputation of developing a bottom and turning up 2mo after the SP500 has developed an “internal bottom”. The “internal bottom” is defined as the day when the majority of SP500 stocks have set 52wk lows-we only see this in hindsight. The SP500 did this in Oct 2008 and the PMI followed in Dec 2008 with a reading of 32.9%-again only by hindsight can bottoms be identified.
Second, the ISM Price Index bottomed in Jan-Feb 2009 with 2 back-to-back readings of 29.0% and registered the general ability to raise prices in June 2009. This means that manufacturing companies were able to achieve better margins for the first time in this recovery in June 2009.
Third, the ISM Production Index bottomed in Dec 2008 with 26.3%, but importantly in June 2009 once prices were favorable, production was increased. This is the natural progression of recoveries. Once one can achieve stable to rising prices which is a sign of increasing demand, then you can comfortably begin to raise production.
Importantly: Rising Margins + Rising Production = Improved Profitability
Forth and the most important from so many points of view is the ISM Employment Index which bottomed in Feb 2009 at 26.1% and after manufacturing corporations had achieved increases in profitability registered expanding employment in Oct 2009.
Economic recovery is a process that can be logically followed. When there is economic disruption, it is best to take the time to look at the sub-components to understand that the process of recovery has a valid basis and that the indicators that flash by ever-so-quickly actually have solid underpinnings that coincide with common sense.
Because the surveys performed by the Institute for Supply Management cannot be manipulated by market participants, it is one of the more trusted indicators used by long term investors. Copper, gold, oil and other commodity prices and the Baltic Dry Index(shipping index) have been more recently been distorted by investors seeking to place themselves favorably into profitable situations. Copper and other commodities prices are impacted by their use as currency and pure trading vehicles. The Baltic Dry Index which previously used to be immune to investor effects has been impacted as investors sought to rent ships as storage facilities for commodities bought for investment purposes. The value of these economic indicators once so popular with well known traders, Dennis Gartman and Doug Kass, should not be taken today as pure representations of economic acitivty.
The ISM PMI and sub-indices remain very helpful in gaining insight to economic factors.