Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The US equity market, represented by the S&P 500 index, slipped 0.5% for the week ending January 20.
  • Institute for Supply Management (ISM) surveys, often cited by investors and the financial media, sometimes serve as a useful temperature check, but their record for accurately pinpointing economic slowdowns is mixed, at best.

Investors and traders are constantly trying to discern which direction the economy is heading. There are a multitude of surveys and models that are blasted throughout the media, from the University of Michigan’s consumer sentiment survey to the New York Fed’s Empire State Manufacturing Survey.

It is an understatement to say that there are conflicting signals from recent surveys about where the economy is heading in 2023.

Some financial journalists and investors have latched onto the most recent monthly Institute for Supply Management (ISM) Manufacturing and Services surveys as evidence that the economy is headed for recession. The ISM Services PMI (Purchasing Managers Index), expected to print a 55.0 number, came in at 49.5 last week, well below expectations.

Before reaching any conclusions about any survey or index, it is useful to understand how the indicators are constructed. ISM data is obtained from a survey of supply executives and purchasing managers across eleven industries. An ISM index reading above 50 means that the Services component of the US economy is likely expanding, and below 50 means it is slowing.

As Neil Dutta from Renaissance Macro Research noted in a recent interview, this is referred to as a “diffusion index”. As he explains, “Let's say in January, GDP growth is 7%, and in February GDP growth is 7%. What does the ISM do? It goes to 50. Is that bad?”

It is not bad. The ISM survey asks whether business activity is going up, down, or sideways. One can imagine a situation where the economy was in a terrible situation but where the ISM number was well above 50, and where the economy was healthy, but the ISM was below 50. ISM surveys have not shown to be predictive for successful market timing. If anything, the ISM surveys can be a contrarian signal.

The University of Michigan’s Consumer Sentiment survey is another widely cited economic indicator. As some have pointed out, though, that survey’s results tend to follow the price of gasoline. When gas prices fall, consumers tend to feel okay. When gas prices rise, they get cranky. Is there anything newsworthy here?

One should be wary of arguments based upon a few survey results or impressive looking charts showing what certain economic indicators have been able to predict in the past. Usually, those arguments conveniently omit other pieces of evidence which do not fit the narrative at hand.

Sometimes it is hard to know what narrative to believe. The ISM’s Manufacturing survey of a few hundred purchasing managers is showing industrial contraction while the Bureau of Labor Statistics survey of hundreds of thousands of businesses shows that manufacturers are adding jobs. As Mr. Dutta notes, while the ISM Manufacturing PMI has been in the doldrums, industrial stocks have outperformed the market over the last few months. Maybe, as Mr. Dutta speculates, those ISM-surveyed purchasing managers are just grumpy. Perhaps many of them are Chicago Bears fans. Who can say?


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