The most recent report of the Institute for Supply Management (ISM) indicates that United States manufacturing is on the rise again after a three month lull. In the last three years the ISM index has had only three months indicating contraction of the sector and the most recent numbers are the best since 2009. So, is it time to invest in manufacturing stocks? For that matter is a good ISM manufacturing index a good reason to invest in manufacturing stocks or should one do fundamental analysis on individual stocks in the manufacturing sector in order to decide? First of all let’s look at the most recent figures.
The ISM Manufacturing Index
The ISM index is a monthly product of the Institute for Supply Management. The institute was founded in 1915 and is the world’s first such organization. The focus of the ISM is supply management, the “identification, acquisition, access, positioning, and management of resources and related capabilities the organization needs or potentially needs in the attainment of its strategic objectives.” (ISM) The ISM manufacturing index is used by many as an economic indicator as the ordering of materials typically precedes the sale of manufactured products and profits. Want to make money by investing? Follow the ISM to good insights into which economic sectors are on the rise or ready to fall.
The ISM follows these aspects of supply management:
- Strategic sourcing
- Inventory control
- Materials management
- Disposition/investment recovery
- Product/service development
- Manufacturing supervision
The Unexpected Recovery of United States Manufacturing
The reasons we are thinking that one may want to invest in manufacturing stocks are two. The ISM report indicates that US manufacturing is getting back on track after a brief lull. And, the economic boost from Federal Reserve bond purchases will drive down interest rates. Low interest rates commonly go with economic expansion as companies take advantage of low rates to make repairs, expand, increase R&D, and hire more workers. The ISM manufacturing index went up to 51.5 in the last reported month (September). Any number above 42.5 is considered an indication of expansion. Analysts had expected an improvement but not anything this good.
Who Are We Talking About?
When we suggest that you might want to invest in manufacturing stocks who do we mean? Boeing, General Electric, General Motors, United Technologies Corp, Honeywell International, and Caterpillar are just a handful of United States manufacturers. Each company has its niche and its story. General Motors, GM, has just emerged from bankruptcy. Invest in Boeing? Boeing, BA, is rolling out the new state of the art 787 Dreamliner at $200 a crack. Caterpillar, CAT, supports construction projects in the USA and across the world. United Technologies Corp, UTX, provides high tech products for building systems and aerospace. Honeywell, HON, provides diversified products and solutions to customers worldwide. And, General Electric, GE, products and services include aircraft engines, power generation, water processing, household appliances and medical imaging. If you want to invest in manufacturing stocks as the sector recovers the above stocks may well be good places to start.
Where to Invest
If you are going to invest in manufacturing stocks based on the most recent ISM report, remember that the just-released ISM index has to do with US manufacturing and not manufacturing in Japan, China, Taiwan, or Germany. For US manufacturing indices of export growth and placement of new orders were both heartening. Employment in the manufacturing sector also rose. ISM numbers elsewhere were worse. Manufacturing indices in the UK as well as China both fell in September.