With the Greek situation under control for the time being, eyes are likely to once again focus on the United States and its economic woes. The U.S. still has intolerably high unemployment, weak growth prospects, and continued uncertainty over the debt ceiling to boot. Thanks to these issues, many investors have looked to the small but important production side of the economy to help boost the U.S. out of its malaise. For those who track this corner and are putting their chips on a manufacturing led recovery, today’s data release of the Chicago PMI survey could help to set the record straight heading into the third quarter.
The Chicago PMI is a popular economic indicator that, according to Bloomberg, compiles a survey and a composite diffusion index of business conditions in the Chicago area. While the survey doesn’t exclusively focus on manufacturing firms, many believe that the reading analyzes a mix of companies that is very representative of the American economy, helping to give clues on the overall economic picture. Furthermore, since the Chicago PMI is generally released just before the broader ISM Manufacturing survey, many analysts use the Chicago PMI as a preview of this important data release as well.
The consensus analyst estimate suggests that the reading will drop from its prior level of 56.6 to 53.0, still indicating an economic expansion but one at an increasingly slow pace (anything over 50 is an expansion). Furthermore, it should be noted that the analyst range stretches from about 56.0 all the way down to 49.5, suggesting that all of those tracking this indicator are anticipating a slowdown from last month’s levels. Even more troubling is the pace of the drop over the past few months; after hitting a multi-year high of just above 70 in February, the reading has fallen precipitously including an 11 point plunge for the May reading. Thanks to this pace of declines, this month could be key for either extending the trend down towards contraction territory, or reversing the recent gloom and further adding to economic expansion.
Due to this important data release and the light that it will shed on tomorrow’s ISM Manufacturing survey, investors should look for the Vanguard Industrials ETF (VIS) to be in focus during today’s trading session. This fund tracks the MSCI US Investable Market Industrials 25/50 Index which consists of stocks of large, medium, and small U.S. companies in the industrials sector. This sector is made up of companies whose businesses are dominated by one of the following activities: the manufacture and distribution of capital goods, the provision of commercial services and supplies, or the provision of transportation services. The fund puts a large amount of assets in blue chip companies such as GE, United Technologies, and Caterpillar, although VIS does hold about 370 companies in total [see more on VIS's fact sheet].
While the economy remains weak, VIS has managed to perform well over the past few weeks, gaining over 2.1% in the previous two week period. However, the fund has experienced a rough stretch before that, and is down 2.2% over the past four weeks and is down slightly over the past quarter. Should the Chicago PMI show a modest decline or even beat expectations and rise about its previous reading, investors will likely take this as a good sign for tomorrow’s ISM Manufacturing survey and will probably buy up VIS in the process. If, however, investors see a continued drop in the figure or a slump into contraction territory, look for this popular Vanguard product to slump on the day, ending the quarter on a low note.
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Disclosure: No positions at time of writing.
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