What happened?
The Institute for Supply Management (ISM) released bullish survey results suggesting the U.S. manufacturing sector is in for a good start to 2017. The Purchasing Managers' Index (PMI), based on a survey of purchasing managers, is widely regarded as the best indicator of manufacturing conditions.The PMI is an index created by survey data, whereby a reading above 50 indicates economic expansion. For example, the ISM believes the 53.2 reading reported in November "corresponds to a 3.2 percent increase in real GDP annually."
As you can see below, it's been in positive territory for the last three months:
DATA SOURCE: INSTITUTE FOR SUPPLY MANAGEMENT. CHART BY AUTHOR.
In addition, I've included the ISM non-manufacturing PMI above in order to confirm the positive trends in the data -- after all, many of the stocks also sell non-manufacturing solutions as well.
Does it matter?
Yes. It's good news for three types of companies. First are industrial supply companies like MSC Industrial Direct Co., Inc. (MSM +0.35%) that rely on manufacturing activity to drive sales. Second, it's good for diversified industrials like 3M Company (MMM 2.74%), which has seen sales of its business-focused products trail those of its consumer-facing products in recent times. And it's particularly good news for highly cyclical companies like Emerson Electric (EMR 2.13%), which relies on corporations' willingness to make large capital expenditures.
That said, let's not be too exuberant. The problem areas in the industrial economy have been heavy industries and oil and gas, and the ISM data -- from a broad-based survey -- might not fully capture the extent of the weakness there. MSC Industrial Direct makes significant sales into these sectors, and Emerson Electric's biggest single end market is process solutions.
However, the data is a clear indication of better broad-based conditions, and that's a positive, not least because it implies 2017 will be a recovery year following 2016's decline in industrial production activity. Many stocks in the industrial sector have been bid up in anticipation of some sort of recovery in 2017, and it's heartening to see the ISM data confirming the thesis.
