Manufacturing and The Institute for Supply Management – September 2019

I worked in a steel factory. I drilled holes in door handles. Not to be confused with doorknobs. I was in handles only.

The place I worked in looked like this picture. A “rustic” steel factory.

I sat on a stool at a drill machine and someone would deliver a bucket of handles. I can’t remember now if I was paid by the bucket or the handle, but it doesn’t matter. The buckets kept arriving with an endless supply of handles. I don’t know where those handles went, or who produced the handles. I do know drilling holes put me at the bottom of the supply chain.

Before you yawn and close the window because you think this newsletter is going to be REALLY BORING, hang on a minute.
 
Supply chain management is fascinating. I often start a conversation with this catchy phrase:
“Hey, did you see the ISM survey this morning? I was on the edge of my seat waiting for the results.”

The Institute for Supply Management (ISM) Manufacturing Survey is a closely watched index because it is a leading indicator of the health of the economy.

Investors pay close attention to the survey. The monthly results have predicative value in the financial markets.[1]

For investors the results impact the bond market and the stock market.

Let’s drill down (seriously?) into the index to see why it is so fascinating.

Not to be confused with a fascinator which is something you wear on your head.
 
Something happened in August.
 
Although the overall economy continued to grow, the Purchasing Managers Index dropped below an important threshold.

The threshold is a number. Sorry about that. I know how annoying the whole numbers thing is.

The number is 50. In August the Purchasing Managers Index dropped to 49.1%. This doesn’t sound like a big deal, but it is the lowest reading since January 2016. August represented the first month of contraction in the manufacturing sector after 35 months of growth.

This is what the number represents [2]:

• If the index is above 50 both manufacturing and the economy are expanding
• Between 41 and 50 manufacturing activity is starting to slow although the economy could still be growing.
• Below 41 means we are probably in a recession.

 
Regardless of the reason recessions are a normal part of the business cycle.

This index is unique because the data comes from the private sector, not a governmental agency.

Even the Federal Reserve wants to see the number before it is published.

Purchasing managers provide information on new orders received, inventories and the rate of liquidation, commodity prices, new export orders and imports.

Are new orders up or down? Are companies hiring or laying off employees? What do inventories look like?

Purchasing managers provide their insight and data to the Institute for Supply Management (ISM) and in turn the Institute publishes the Purchasing Managers Index.

Across the board in August purchasing managers have seen contraction in their businesses. Here are a few of the comments published in the survey:
 
“Seeing some relief in the availability of electronic components in the marketplace, but there are still pockets of short supply, allocation, long lead times and the like. Tariffs continue to be a strain on the supply chain and the economy overall.”
(Computer & Electronic Products)
 
“While business is strong, there is an undercurrent of fear and alarm regarding the trade wars and a potential recession.”
 (Chemical Products)
 
“Late planting of the corn and soybean crops has increased uncertainty over the final acres and yields. This is leading to volatile markets.”
(Food, Beverage & Tobacco Products)    
 
One of the ways to diversify your investments is to invest in different sectors of the market.

The survey represents 20 different business sectors. [3]

As an investor, you might be interested in a specific company or a sector in general.

If you see that the sector is starting to contract it follows that stock prices could also contract.

There are several ways to think about investing during a slowdown or recession.

One: if you have stocks with gains it might be prudent to take some of those gains off the table. Of course, make sure you consult with your tax advisor first if the gains are substantial.

Two: if you are sitting on cash, a decline in stock prices presents an opportunity to buy high quality companies at a discount. Buying stocks at a discount is a long-term strategy. You might have to be patient as the economy recovers for prices to recover as well.

Three: In the bond market interest rates are declining. Bond prices are going up. If you believe that interest rates will decline further look at short term (maturity) bonds or bond funds. You can use gains in the equity market to reallocate into the bond market. 
 
 
[1] https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm
[2] www.ism.ws
[3] “The Secrets of Economic Indicators” by Bernard Baumohl Third Edition.
        Chapter 3, pages 181 -187