Rising Manufacturing Orders Signal Future Economic Growth

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
Manufacturing

Photo Credit: Christopher Burns, Unsplash

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 (i.e., the individuals who manage their firm’s supply chains) about their business and operations. Survey questions include new orders, production levels, employment, inventory, and prices. 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 increased orders, while readings below 50 indicate decreased orders. Why do new orders matter? This is 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 chart below shows the New Orders sub-index from the ISM survey. The index dropped below 30 as the economy shut down during the pandemic, which signaled a sharp decline in orders. As the economy reopened and manufacturing activity resumed, order activity increased. The New Orders index rose above 50 in June 2020 and remained above 50 until July 2022, which signaled an extended period of rising orders and economic expansion. However, the growth rate for new orders slowed during 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, signaling a slowdown in orders and manufacturing activity.

The far-right side of the Manufacturing New Orders Index 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 expand again, providing insight into corporate earnings. The relationship with future S&P 500 earnings growth chart compares the New Orders sub-index against the S&P 500’s year-over-year earnings growth. 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.

ISM Manufacturing New Orders Index

Relationship with Future S&P 500 Earnings Growth

Relationship with Future S&P 500 Earnings Growth
 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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