ISM’s 14-Year High Forecasts Economic Health

The Institute for Supply Management’s (ISM) primary manufacturing gauge just posted its strongest reading in 14 years. Is that a clear signal the economic cycle still has fuel left in its tank, or could it mean the good times are coming to an end?

As shown in LPL’s Chart of the Day, strong manufacturing growth has been a bellwether for overall economic health. Over its past five cycles, the U.S. economy has fallen into a recession an average of 46 months—nearly 4 years—after ISM’s U.S. Purchasing Managers’ Index (PMI) peaked. The fact that we may have hit a peak is not necessarily a cause for investor concern, and the potential for future economic and market growth remains strong in our view.

Manufacturing-strength-is-a-bellwether-for-economic-growth-and-stock-gains

Growth in manufacturing output last month was primarily driven by domestic demand. ISM’s gauge of new orders jumped the most since August 2014, while export orders fell to a 10-month low and import orders dropped to an 11-month low.

“The jump in new orders is a strong sign that the impact of fiscal stimulus continues to outweigh trade concerns, a theme we’ve emphasized in multiple reports this year,” stated LPL Research Chief Investment Strategist John Lynch. “Favorable tax policy has boosted business investment and consumer spending, and we expect this combination to continue to benefit the manufacturing sector.”

Some data do hint to potential weakness and pricing pressures. Details in the ISM report point to continuing supply chain disruptions, or difficulties for manufacturers in getting the supplies necessary to produce goods. Manufacturing may be especially susceptible to future weakness from trade tensions, and cooling in trade activity is already evident in the divergence between domestic and international orders.

However, we believe the tailwind of fiscal stimulus will continue to overwhelm any negative impact from trade tensions and supply chain disruptions, buoying manufacturing and strong economic output through the end of this year.

For more analysis on the state of manufacturing, check out the latest Weekly Economic Commentary. The ISM PMI gauge also is one of the measures we monitor in our Recession Watch Dashboard, updated quarterly on the House of Charts.

 

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