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.

Investor’s Corner

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.