Manufacturing Muscle - September 5, 2018
A closely followed gauge that takes the pulse of U.S. manufacturing hit a 14- year high in August (Institute for Supply Management).
The ISM Manufacturing Index rose 3.2 points in August to 61.3.
Readings above 60 are strong.
A level of 50 would suggest U.S. manufacturing activity is neither expanding nor contracting.
Strength was broad-based.
The ISM used the word “strong” or some variation eleven times in the August report.
Trade frictions appear to be having little overall impact on national manufacturing.
The report suggests U.S. manufacturing activity is accelerating from an already solid pace.
Manufacturing employment accounts for 8.5% of total U.S. nonfarm payrolls, according to the U.S. BLS.
However, over the last 20 years, the correlation between the S&P 500 Index and the ISM Manufacturing Index has been a strong +0.71 (ISM/S&P 500 data), where—
+1.0 means the two variables move in lockstep,
-1.0 means the two variables move in opposite directions, and
0.0 means there is absolutely no correlation between the two.
The U.S. economy is service-based. But manufacturing activity influences U.S. stock market activity.
Bottom line—today’s strong manufacturing sector is underpinning U.S. stocks.