Chart of the Month | April 2024
Rising Manufacturing Orders Signal Future Economic Growth
The Institute of Supply Management (ISM) conducts a monthly survey that focuses on the manufacturing industry. The survey asks purchasing and supply managers from over 400 manufacturing companies and 20 different industries about their business and operations. Investors and economists follow the survey closely because it can provide context about broader economic conditions.
The survey question about new orders asks if orders increased or decreased compared to the prior month. Readings above 50 indicate orders increased, while readings below 50 indicate orders decreased. Why do new orders matter? It’s because purchasing decisions must be made in advance to meet future manufacturing needs. If orders rise and a company expects to increase production, it must buy the required raw materials and other manufacturing inputs months ahead. As a result, rising orders are viewed as a positive for the economy.
The far-right side of Figure 1 shows the New Orders index climbed above the key 50 threshold in January 2024, the first time in 16 months. The rise above 50 indicates that manufacturing activity may be starting to expand again, but it also provides insight into corporate earnings. Figure 2 compares the New Orders subindex against the S&P 500’s year-over-year earnings growth. In general, earnings growth tends to be stronger when the New Orders index is higher. If the New Orders index remains above 50 in expansion, it could be a positive signal for the economy and earnings.
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