US Manufacturing On Fire

J: The economic data flow for July started off with a bang—appropriate for today as we celebrate Brexit 1776—thanks to the good people at the Institute for Supply Management (ISM) in Tempe, AZ. They told us that the June 2017 PMI (Purchasing Managers Index) was 57.8 percent, the highest reading since 57.9 percent in August 2014.

This index is a diffusion index, meaning that it measures the difference between positive (or no change) responses and negative ones from thousands of purchasing managers in 18 industry groups from all over the US. It is one of our oldest economic indicators, having been compiled and published since 1931 except for the four years of World War II. Among major indicators of the real side of the economy, only the industrial production index reported monthly by the Board of Governors of the Federal Reserve System is older.

Any reading in the PMI above 50.0 percent means the manufacturing sector is expanding. This was the tenth consecutive month for that. A number above 43.3 percent indicates that real GDP is growing (an empirical conclusion based on historical data). This was the 97th consecutive month that that was true.

June’s 57.8 percent level of the index is consistent with real GDP growth of 4.6 percent at a seasonally adjusted annual rate. (L: Don’t forget, every number is seasonally adjusted unless we say otherwise.) The average for the first half of 2017 (56.4 percent) is consistent with real GDP growth of 4.1 percent. L: This means that in the past, these kinds of PMI numbers foreshadowed great real GDP numbers. As you know if you’ve been following us (or the US economy in general), the strong linkage of PMI numbers to GDP growth has weakened considerably during this expansion. J: Wouldn’t it be great to see some numbers like that coming from BEA later this year? L: Alas, even the economist with the most optimistic forecast for GDP growth (his initials are JFS) doesn’t think that’s gonna happen.

The chart below shows the index. It’s clear how impressive the June reading is.

All the components of the index were very positive for June. Orders, production and employment were all growing at a fast pace. Inventories were falling.

The PMI is the first economic indicator we get very month. It was so strong that the Atlanta Fed raised its GDP Now forecast for the second quarter from 2.7 to 3.0 percent. We’ll get the first estimate for that from BEA on July 28, along with revised quarterly data starting with the first quarter of 2014. We’ll be watching for those data quite eagerly.

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