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Manufacturing Orders   - An Indicator of Growth [VIDEO] Thumbnail

Manufacturing Orders - An Indicator of Growth [VIDEO]

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 across 20 different industries about their business operations.

Survey questions ask about new orders, production levels, employment, inventory, and prices. Investors and economists follow the survey closely because it can provide context about broader economic trends and conditions.

One of the survey questions asks if new 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? 

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 materials and inputs months ahead of time. As a result, rising orders are viewed as a positive for the economy.

Figure 1 graphs the New Orders sub-index from the most recent ISM survey:

Chart - Manufacturing Orders Index

In early 2020, the index dropped below 30 as the economy shut down during the pandemic and new orders plummeted. As the economy reopened and manufacturing activity resumed, new order activity increased and the index rose above 50 in June 2020.  The index remained above 50 for about 2 years as the economy expanded. However, the rate of growth for new orders slowed by mid-2022 as the Federal Reserve raised interest rates. The New Orders index dropped below 50 in September 2022 and remained below that threshold until December 2023 as manufacturing activity slowed.

Figure 1 shows the New Orders index climbed above the key 50 threshold in January 2024, the first time in 16 months. Since then the index has fluctuated around the 50 and registered 49.1 in April. 

New Orders and S&P 500 Earnings Growth

Figure 2 compares the New Orders sub-index against the S&P 500’s year-over-year earnings growth:

Chart - New Orders vs. S&P 500 EarningsThe data suggests that earnings growth tends to be stronger when the New Orders index is above 50. As detailed above, earning growth has been positive 85% of the time when the New Orders Index is above 50.  If the New Orders index can get back above 50, it could be a positive signal for the economy and earnings.

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