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May's ISM Purchasing Managers' Index (PMI)

No industry reported a contraction last month.
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Friday morning, shortly after the opening bell, the Institute of Supply Management (ISM) reported that the purchasing managers' index (PMI), which measures the economic environment within the manufacturing sector, increased 1.4% in May to 58.7%, surpassing expectations of an increase to 58.2%. For reference, over the past 12 month period (June 2017 through May 2018), PMI has reached a high of 60.8, a low of 56.5 and averaged 58.7. This follows April's 57.3% reading and marks the 109th consecutive month of expansion in the overall economy and the 21st in the manufacturing sector.

This is a key economic metric as manufacturing is responsible for roughly 12% of the U.S. economy. Also, recall, anything above 50 represents expansion in the manufacturing economy while anything below 50 indicates a contraction. Additionally, according to the ISM, a PMI reading above 43.2% over time is usually indicative of an expansion of the overall economy.

In addition to the headline reading, the new orders index advanced 2.5% month over month to 63.7% (indicating a faster rate of growth), production increased 4.3% to 61.5%, prices for raw materials (an input for manufacturers) ticked up 0.2% to 79.5%, and the employment index gained 2.1% to 56.3%.

With this, new orders have now increased for 29 consecutive months, production has advanced for 21 consecutive months, prices have risen for 27 consecutive months and employment has gained for 20 consecutive months.

Furthermore, according to ISM Manufacturing Business Survey Committee Chair Timothy R. Fiore, "the past relationship between the PMI® and the overall economy indicates that the PMI® for May (58.7 percent) corresponds to a 4.8-percent increase in real gross domestic product (GDP) on an annualized basis." This is indicative of more room to run in the overall economy and should help reinforce the Fed's goal of additional rate hikes throughout the year; a key consideration for the market in general and our financial holdings -- JP Morgan (JPM) , Citigroup (C) and Goldman Sachs (GS)  -- in particular, which benefit from rising interest rates and in the case of Goldman Sachs, the volatility that has come with the rise in yields.

Regarding the potential of future hikes, according the CME FedWatch Tool, the market is currently factoring in a 91.3% probability of a June rate hike from a range of 1.50% to 1.75% currently, to 1.75% to 2.00%. Members interested in tracking this metric may do so here.

Digging deeper, of the 18 manufacturing industries tracked by ISM, 16 reported growth in April, led by Textile Mills; Nonmetallic Mineral Products; and Electrical Equipment, Appliances & Components. No industry reported a contraction last month.

Lastly, in order to help members use this report to better gauge their own investments, we want to include a few quotes from ISM survey respondents in the various manufacturing industries (pulled directly from the ISM report):

  • "We are currently overselling our forecast and don't see an end to the upswing in business. We are very concerned, however, about the tariffs proposed in Section 301 and are focusing on alternatives to Chinese sourcing." (Transportation Equipment)
  • "Very difficult to hire skilled and unskilled labor." (Food, Beverage & Tobacco Products)
  • "We are concerned about the strong dollar affecting our export orders as well as the steel tariffs, which are causing domestic steel prices to rise." (Fabricated Metal Products)
  • "Strong demand from (agricultural) business; solid demand in all other business segments." (Chemical Products)
  • "Sales remain strong. Lead times and direct material costs are soaring." (Machinery)
  • "Suppliers are seeing price increases and trying to pass them on." (Miscellaneous Manufacturing)
  • "Continued talk around steel tariffs has resulted in price increases for domestic line pipe, while HRC seems to be moving sideways. Temporary exemptions for allies and an agreement with South Korea have not calmed the market." (Petroleum & Coal Products)
  • "Growth seems to be coming in the construction industry, but at a slower pace than expected with delays due to weather in the U.S. Business in (Latin America) is way up, and Canada is off to a decent start." (Nonmetallic Mineral Products)
  • "Industry demand is causing price increases. Fuel prices are also on the rise, and there have been (price) increases associated with that." (Primary Metals)
  • "Severe allocation, long lead times and upward price pressure, particularly in the electronic components market, continue to hamper our ability to meet customer demand and our shipping schedule." (Computer & Electronic Products)

Members interested in digging even deeper can view the official release, here.

Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long JPM, C, GS.