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The Numbers You Need to Know on American Manufacturing

By Dan Carroll - Oct 2, 2012 at 12:34PM

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What did September's PMI have in store for this sector?

Yesterday, the Institute for Supply Management released its monthly Purchasing Managers' Index -- a record of acquisitions of goods and services by the manufacturing sector. With all eyes on the index to see whether manufacturing could break out of a three-month streak of contraction, let's take a look at what this month's numbers will mean for the Dow Jones Industrial Average (^DJI 1.61%) and some of its component companies.

On the upswing
September's PMI came in at a reading of 51.5, indicating an expansion of manufacturing activity in the U.S. A rating of less than 50 indicates contraction, while numbers higher than 50 indicate expansion. This month marks the first expansionary period since May. In further good news, the ISM recorded that the overall economy grew for the 40th month in a row, continuing a long, if sluggish, rise out of the 2008 recession.

The Dow boomed on the news yesterday as it rocketed up more than one hundred points earlier in the day before giving back some of those gains later, although today's trading has been mixed. Since the PMI can often be looked at as an indicator of the economy's future -- considering that sharp declines in manufacturing are a great way to spark a recession, as Europe is showing with the region's 14th straight month of sector contraction in September -- yesterday's report breathed a little optimism into the continued American recovery.

A few specific points of data in this month's PMI stand out. New orders for goods and services broke into expansion territory, rising more than five percentage points to a reading of 52.3 after last month's disappointing score of 47.1. Meanwhile, production grew slower and still remained in contraction territory at 49.5, while inventories declined by more than two percentage points. Along with contraction in order backlogs, these indicators show that manufacturers could ramp up production in the short term to meet the plethora of new orders -- a strong sign for investors in this sector.

A mixed bag for Dow companies
It's this sentiment that likely pushed the financial sector up in the Dow yesterday, as Bank of America (BAC 2.32%) and JPMorgan Chase both rose by more than 1%. Increasing orders -- and any production stemming from them -- will require renewed financing. With this, along with the Federal Reserve's loose monetary policy pushing easy money into the system, major banks face a great opportunity to capitalize on the meeting of two positive trends.

It's not all sunshine and rainbows for Dow companies involved in the manufacturing business, however. Diversified manufacturer Caterpillar (CAT 1.76%) received a mixed bag of news. While 11 of the 18 represented manufacturing industries expanded, six declined, including machinery, an industry Caterpillar strongly represents. Chemical company DuPont (DD) could also be vulnerable, considering that the chemical-products industry recorded contraction as well. However, these two Dow staples are diversified enough in their product lines to take any short-term blows without much difficulty.

Aluminum producer Alcoa (AA) looks like the biggest loser from this month's report. The ISM reported that aluminum prices fell further this month, potentially denting the company's margins. However, for turnaround investors out there, increases in future production from September's gains in new orders should eventually boost the likes of Alcoa and other metals producers that have taken big hits lately.

Domestic strength among international woes
While manufacturing continued to weaken across the globe -- international PMIs showed contraction everywhere from China and South Africa to the eurozone -- things looked up in the U.S. Investors worried about the American economy dipping back into recession can have confidence that U.S. manufacturing is doing its part to fuel growth.

You'll need to make sure you have all the right information to beat volatility, however. To get all the details on two major Dow companies undoubtedly smiling upon the uptick in manufacturing, check out The Motley Fool's premium guides to Caterpillar and Bank of America. Each report comes with a full year of updates, so check out your copy today.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$32,637.19 (1.61%) $516.91
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$36.67 (2.32%) $0.83
Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$212.99 (1.76%) $3.68
Alcoa Inc. Stock Quote
Alcoa Inc.
AA
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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