In an unusual circumstance, the ISM manufacturing index was one of the most discussed topics in the financial world because it hit its 13 year high. This led to much more analysis done on the report than usually occurs. The ISM saying manufacturing is the strongest in 13 years is a major proclamation which can easily be criticized. It’s easy to find other metrics which aren’t at their 13 year high. I think that analysis misses the point. Manufacturing is strong as shown by many regional Fed reports and many companies. Whether it is the strongest of this cycle or slightly below that is immaterial in my opinion. You invest based on future expectations, so the minor details of the past results don’t matter much.
One of the additional analyses of the manufacturing economy is seen below. The chart shows 8 emerging market PMI reports and 10 developed market PMI reports. As you can see, every report is positive. This goes along with every stock market being up this year. The global economy is in a happy place with demand rebounding, global trade growth accelerating, and inflation staying moderate. Brazil has been one of the countries which has seen the most improvement as it emerges from its recession and the economy is able to get past the numerous political corruption scandals. This indicator has America at 53.1 which is near the 53.2 global average. America catching up to other economies in the past few weeks adds to the bullish narrative on the dollar. The dollar index is at $93.87 which is just 10 cents off its 1 month high.
Before we go any further with looking at the manufacturing economy, let’s review how great the ISM report was. It came in at 60.8% which is impressive given the weakness that was caused by the hurricanes. This headline report correlates with a 5.5% increase in annualized real GDP growth. Clearly, that’s unattainable unless there is a quick burst in growth from a tax cut. Even the 4.4% growth rate that is based on the year to date ISM reports isn’t attainable. This means that either the manufacturing economy is growing faster than the overall economy or that these numbers are too high. I think both are true because the manufacturing labor market is exhibiting more tightness than the service sector and because manufacturing production isn’t as great as this survey (which we will review later in this post).