September 27, 2022

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Key Takeaways

Many investors know about reports that help the Federal Reserve shape interest rates. The most prominent is the U.S. Consumer Price Index (CPI), but not many investors know there are additional reports available. These reports don’t get much news coverage, but they are just as important.
The ISM Manufacturing Index is one such report. It offers a wealth of knowledge when it comes to the health of the manufacturing industry in the U.S. Let’s explore who generates this report, as well as the data it contains and what that signifies for inflation and the economy at large.
The Institute for Supply Management is the world’s largest non-profit professional supply management organization. It was founded in 1915 and certifies, educates, and develops leaders for the supply chain industry. It also surveys purchasing managers and releases the ISM Manufacturing Index.
The ISM Manufacturing Index is a leading economic indicator for the level of economic activity in the manufacturing sector in the United States. This means the results of this report indicate or predict what will happen in the economy in the future.
The stock market is another leading economic indicator. The market can rally if investors expect positive economic times ahead. On the other hand, it can sink into a bear market if they expect the economy to sour in the near term.
There are also lagging indicators, which reveal trends in hindsight. These are reports that come out after the boom or bust cycle of the economy has begun. For example, the National Bureau of Economic Research will formally state the U.S. economy is in a recession a few months after the economy enters the recession.
Overall, there are a handful of leading and lagging indicators that, when put together, give analysts a more complete picture of the economy’s health.
The latest collection of data from the PMI from August 2022 are a mixed bag. On the positive front, the prices paid component of the ISM Manufacturing Index is moving sharply lower, which is a good sign. It points to a stronger balance between supply and demand, which benefits consumers by slowing the rise in prices.
During the inflationary spikes in the 1970s and 1980s, a downturn in prices paid was a leading indicator of lower inflation rates. If the same holds true today, we might see an easing on the inflation front in the coming months.
The negative side of the report’s findings is that factory growth remains slow and production has slowed. There is still a dark cloud looming over the outlook for the economy, and experts continue to debate whether the U.S. will end up in a recession. While the consumer continues to remain strong, businesses are being cautious.
Gas prices in the U.S. have dropped to an average of $3.677/gallon, a decline of more than 25% from their all-time high in mid-June; prices are at their lowest levels in six months. This is another good sign for both the consumer and the economy.
As it becomes more affordable to drive, people can travel more and have more money to spend on things other than gas. However, the question is whether the low prices will last. While the fall driving season brings a cheaper blend of gas to manufacture, there will colder weather to deal with soon enough.
Global container freight rates have hit a 16-month low, down 52% from their peak. This is still four times higher than pre-pandemic levels but moving in the right direction. For many months, demand outpaced supply as lockdowns and supply chain issues caused delays. Now that the supply of goods and demand for shipping them have evened out, prices have come down.
The supply chain still has a long way to go to catch up to demand entirely, but signs indicate it is heading in the right direction.
As an investor, what indicators should you pay attention to for clues to the economy’s health? 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 baseline on how the economy is doing.
For lagging indicators, look at the U.S. Consumer Price Index, 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 economy’s health is essential for investors. While it isn’t foolproof, looking at leading indicators can help you review your investment plan and make necessary changes.
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