PMI data points to recovery potential

PMI data points to recovery potential

Recent purchasing manager index (PMI) data has reached a level not seen since 2009.

What can we learn from historically weak readings in the Institute of Supply Management‘s Manufacturing PMI?

The Institute for Supply Management (ISM) conducts a monthly survey of 300 purchasing managers at manufacturing companies in the United States. The purchasing managers respond to a series of questions to gauge the health of their businesses. Readings over 50 suggest the economy will likely expand. Readings under 50 suggest the economy will likely contract. The survey data goes back to 1949. Below is the time series history of the data:

Data Analysis (quarterly data)

In the 70 years of the series, there have only been 9 readings of 42 or below. When the index reached that level, the returns that followed were positive:

  • One-year annualized returns: 40.23%
  • Three-year annualized returns: 18.55%
  • Five-year annualized returns: 15.32%

In April 2020, the manufacturing PMI reading was 41.5, setting up a potentially positive environment.

Conclusion

Readings of 42 or below are extremely rare, occurring only 9 times in 70 years. The April reading of 41.5, marked the 10th time.

Since April, the ISM PMI has begun to climb, registering 43.1 in May and 52.6 in June.

The stock market is a discounting mechanism. Historically, the stock market bottoms on bad news. The economic data is measuring what has already occurred. Generally, it looks forward and anticipates.


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