Macro Monday 13~Purchase Managers Index

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ECONOMICS:USBCOI   United States ISM Purchasing Managers Index (PMI)
Macro Monday 13

ISM Purchasing Managers Index

The ISM Purchasers Managers Index (PMI) measures month over month change in economic activity within the manufacturing sector.

The PMI is a survey-based indicator that is compiled and released each month by the Institute for Supply Management (ISM). The survey is sent to senior executives at more than 400 companies in 19 primary industries, which are weighted by their contribution to U.S. Gross Domestic Product (GDP).

A PMI above 50 represents an expansion in manufacturing when compared with the previous month. A PMI reading under 50 represents a contraction while a reading at 50 indicates no change. The further away from 50, the greater the level of change.

According to Investopedia "ISM data is considered to be a leading indicator of economic trends. Not only does the ISM Manufacturing Index report information on the prior two months, it outlines long-term trends that have been building over time based on prevailing economic conditions".

The ISM reports are released on the first business day of each month for the month that has previously closed. Thus, they are some of the earliest indicators of current economic activity that investors and business leaders get regularly. Something to look out for next Monday 2nd October 2023.

The PMI focuses mainly on the five major survey areas;

1. Employment (20%)
2. New orders (30%) Covered in Macro Monday 6
3. Production/Output (25%)
4. Inventory levels (10%)
5. Supplier deliveries (15%)

We covered the ISM New Orders Index in Macro Monday 6 as it is the largest component of the Purchaser Managers Index making up 30% of the overall index. I will leave a link to the chart.

The Chart

The chart outlines the last 12 recessions (shaded red zones) with the PMI readings over the same period. As we are already aware above 50 on the PMI reading is expansionary and below 50 is contractionary (red thick line).

Three Main Findings

1. In 11 out of 12 recessions a PMI reading at or below 42 was established. This means if the PMI falls to 42 there is a 92% probability of a recession. At present we have not reached that level, we are currently at 47.6.

2. The PMI has bottomed 10 out of 12 times in Quarter 1 (between Jan – March) with the remaining two bottoms happening in Quarter 2 (both in May). This means that 83% of the time the PMI cycle appears to bottom in Quarter 1 with the most bottoms in January (6) with Feb(2) and May(2) in close second place.

- It’s worth noting that the bottom of the PMI cycle
may not be the bottom of a stock market cycle. If
we are forward looking then a rising PMI is positive
for the economy and markets but ideally a move
above 50 is the true signal of economic expansion
from a manufacturing standpoint.

3. The average PMI bottom to bottom cycle timeframe over the past 6 cycles is 58 months with the shortest being 37 months and the longest being 86 months. We are currently at month 38 and the average month of 58 is Jan 2025 with the max of 86 months being May 2027.

- How interesting is it that both these potential PMI
bottom dates line up with our two most frequent
PMI bottom months indicated in point 2 (January
and May).

- Interestingly according to U.S. government
research, since WWII the business cycle in America
takes, on average, around 5.5 years which closely
aligns with our 58 month (or roughly 5 year)
indication for the PMI chart. The business cycle
incorporates an aggregate of economic data such
as the ISM data, GDP and income/employment
metrics. We might cover the business cycle in more
detail on a future Macro Monday.

The ISM New Orders Index (30% of the PMI)

Similar to the ISM New Orders Index Chart (covered in Macro Monday 6) which makes up 30% of the PMI, we have not reached below the 42 level on this chart either which has provided a 100% confirmation of recession when we have had a definitive move below the 42 level historically.

For ISM New Orders if we stay below a sub 50 level on the ISM New Orders Chart for greater than 7 months it has resulted in a recession every time except for 1966 and 1995 (8 out of 10 times). We are currently 14 months below the 50 level which is unprecedented, with the new orders index nudging a little lower on the August reading from 47.3 down to 46.8.

ISM Data Release 2nd October 2023

When we receive our next ISM Data release next Monday 2nd October 2023 we can refer back to the PMI chart and the New Orders Index Chart and see how things have progressed and if we have reached and critical levels.

These charts and the others I have completed on Macro Mondays are all designed so that you can revisit them at any point and press play on TradingView and see if we are breaking new into higher or lower risk territory.

I hope they all help towards your investing and trading decisions.

Have a great Monday guys, Lets get after it!

Added clarification on the above chart:

Recession Perspective
- 11 of the 12 recessions on the chart coincided with a
PMI of less than 42

- 1 recession occurred that did not breach below the 42
level (No. 9 on the chart)

PMI 42 Level Perspective
- 12 of the 13 times that the PMI moved below the 42
level, this coincided with a recession.

- 1 time we have had a sub 42 PMI reading without a
recession (Between 11 & 12 on the chart).

Based on both historical perspectives, there is an c.92% probability of a recession should a sub 42 PMI level be established, or vice versa, in the event of a recession confirmation there is a c. 92% probability it would coincide with the sub 42 PMI level.
Purchasing Managers Index Update (PMI)

US ISM PMI was released yesterday coming at 49.00, up from 47.60 last month.

Whilst this is an improvement I have a cautionary message to share.

I have updated the chart with the new 49 reading which appears like a positive move up towards the 50 level (> 50 being expansionary and < 50 being contractionary). However we need to be acutely aware of the following:

- During or directly before Six of the Recessions on
the chart the PMI was below the 45 – 46 level and
then reverted back up to the 50-51 level before
rolling over to much lower levels (Recession No. 12,
9, 8, 6, 4 and 1 on the chart).

- This means until we clear the 51 level comfortably
we should be very cautious.

- The four most similar instances on the
chart with we came down to
the 45 – 46 level (similar to what we recently did) on No. 8,6,4&1). I
excluded the two times that we went lower (no. 12
and 9 which reached down toward the 42-43 level).

The next PMI will be released on Wednesday 1st November 2023 and we can revert to this chart then and see how things are progressing.
ISM Purchaser Managers Index Release

⚠️Declines from 49.0 to 46.7 (est. 49.0) ⚠️

A rejection before we even reach the 50 level which would have been promising in terms of flipping to expansionary instead of moving further into contractionary territory (<50 level).

The chart below highlights the following:

1. In 11 out of 12 recessions the PMI reading at or below 42 was established.
- Fortunately we have not reached this level YET.

2. 10 out of 12 PMI bottoms occur in Q1. The remaining two occurred in Q2.
- In this respect we should not be surprised if we make lower lows in Q1 2024 in particular on the PMI front. This timeline is further supported by point 3 below.

3. The average PMI bottom to bottom timeframe over the past 6 cycles is 58 months (Min 37 Max 86).
- We are currently in month 40 meaning we are into the time window for a bottom 37 – 86 months.

Based on the above findings it is a probable that we bottom in the PMI in Q1 2024 which are months 43 – 46. However we could also bottom at the average of month of 58 in January 2025 also Q1.

Obviously timing this is difficult but the increased Q1 probability is helpful and knowing the potential bottoming period average is between here and Jan 2025 is useful. Patience maybe required not matter what positions your are holding, we could be in for a long slog but must be prepared for the short term potential outcome also. He need to be nimble and patient, a difficult combo to manage.

I will be following up with New Orders which we covered in the past in detail and is the only component within the PMI that is demonstrating expansion at present so it is worth covering.

ISM - Purchasing Managers Index (PMI)
Rep: 49.1 ✅Higher Than Expected ✅
Exp: 47.2
Prev: 47.1 (revised down from 47.4)

A much higher than expected reading. This PMI cycle might have bottomed and now be returning up towards expansionary territory (>50 on the chart). It will be interesting to see the release in Feb and see can we get above the 50 level.
ISM - Purchasing Managers Index (PMI)
Rep: 47.8 🚨Lower Than Expected & Prior Month🚨
Exp: 49.5
Prev: 49.1 (No Revision)

A lower than expected reading and decline from last month’s reading from 49.1 to 47.8

It is possible that the PMI cycle might have bottomed in June 2023 with lows of 46 on the PMI (month 38). Since then we have been oscillating in a general trend higher but we have been rejected from 49 level twice… thus, we are still in contractionary territory below 50 and this ultimately means we do not have confirmation of any trend change to expansionary.

The average PMI bottom to bottom timeframe over
the past 6 cycles is 58 months (Min 37 - Max 86), you can see this illustrated on the chart. As we had a low in June 2023 (month 38) this could be the low for this cycle but as I said above, its not confirmation until we get above 50 or at least get past the average of a 58 month timeframe.


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