The Institute of Supply Management (ISM) report came out today showing the largest uptake in manufacturing in the US since June last year. The report stated national factory activity rose to 54.8 from 53.4 in March, besting expectations of 53.0. New orders climbed to 58.2 from 54.5, while the employment index also improved to 57.3 from 56.1.
The ISM survey asks the 400 purchasing managers over 200 industries a series of questions about the economic climate. The questions are related to subjects such as new orders, production and hiring.
The data is put together in an index which has been published since 1947 and has proven to be a very good indicator to what the state of the economy will be like in 3-6 months out. The index is between 0 and 100. A reading below 50 indicates contraction in the manufacturing sector and therefore the economy as a whole, while a number above 50 means expansion.
The ISM moves in cycles the same way as Gross Domestic Product (GDP), but crucially it seems to precede the GDP cycle by 3-6 months, so the ISM can help us predict changes in GDP, which in turn helps us predict changes in the stock market.
The following chart matches the relationship between the ISM and the returns of the S&P 500, known to be a leading indicator of strength or weakness in the market.
As you can see it has been a very close predictor of market behaviour, so this most recent number gives me call for optimism for the rest of the year.
May today be a profitable day…for all of us!