At first blush, this morning’s Institute for Supply Management (ISM) Manufacturing Purchasing Manager’s Index (PMI) looked benign — right in-line with expectations.
The headline index came in at 47.2, which is up from 46.8 in July and only slightly below the 47.5 consensus of Wall Street economists before the release.
As I explained in the most recent issue of Smart Bonds, “It’s All About the Cycles,” PMI readings in the high 40s suggest economic weakness but no imminent recession. Typically, I’d need to see PMI fall to 42-43 or below to indicate a recession is likely over the next 3 to 6 months.
However, I find a simple ratio creating using data from the same ISM Manufacturing release can provide a useful preview of what could be next for PMI.
This ratio can help confirm weakness in the headline index, suggesting rising risk of recession. And, in prior cycles like 2015-16 it’s also (correctly) signaled that worries about recession were overblown.
Unfortunately, this ratio is flashing a warning sign for the economy right now and that’s something I’ll be watching closely over the next 2 months.
I explain it all in this short video presentation.
To be clear, I don’t believe we’re quite to the point where recession is imminent and it’s still possible the Fed could engineer a soft landing this cycle.
However, I do believe it’s time to make changes to the model portfolio in Smart Bonds both to reduce our exposure to problem areas in the global bond, credit and preferred market and boost our position in niches that tend to perform well as the Fed starts to cut rates, whether or not that cutting cycle ends in recession.
If you’re interested in the three model portfolios of bond, credit and preferred ETFs I’ve created in the paid tier of Smart Bonds, I’m offering 60-day FREE trials for a limited time via this link:
DISCLAIMER: This article is not investment advice and represents the opinions of its author, Elliott Gue. Smart Bonds is NOT a securities broker/dealer or an investment advisor. You are responsible for your own investment decisions. All information contained in our newsletters and posts should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision.
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