Manufacturing Muscle, Part 2 - September 10, 2018

Last Tuesday, the Institute for Supply Management reported its closely followed gauge that tracks manufacturing hit a 14-year high. Put another way, it is the best reading of the economic recovery, a recovery that began in late 2009 (NBER).

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The ISM Manufacturing Index is not a household name, but among analysts and economists, it is an important gauge that takes the temperature of U.S. manufacturing.

Rising from July’s 58.1 to 61.3 in August – see Figure 1, the ISM Manufacturing Index signals that activity in the goods-producing sector is strong.

The ISM said strength was broad-based, with 16 of 18 industries reporting growth.

Some respondents of the survey continue to fret about trade tensions, but the 14-year high in the index signals any problems related to trade have yet to materialize.

That’s good news and illustrates that economic momentum, which started building in the second quarter, is carrying over into the third quarter.

While a robust manufacturing sector lends support to employment and the overall economy, it has an important benefit for investors. The graphic below highlights the close correlation between what’s happening in the manufacturing and what’s happening in the stock market.

While we see a brief disconnect in the mid-1990s, for the most part, growth in manufacturing is supportive of stocks.

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Trade frictions, emerging market woes, and at times, political drama in Washington have had a short-term influence on stocks. We can’t discount volatility going forward, but the robust economic fundamentals have lent support to shares.