ISM Manufacturing Index Rebounds From 2-Year Low: 5 Top Picks

U.S. manufacturing registered a strong rebound in March from its lowest point in two years. Orders, hiring and production picked up after two particularly dismal months. Additionally, construction spending hit its highest level in nine months in February.

Meanwhile, retail sales and IHS Markit index numbers for February disappointed. But manufacturing and construction spending numbers are forcing economists and market watchers to reassess their position on the U.S. economy. Many now believe that the ongoing expansion is unlikely to end any time soon.

A near-term solution to the U.S.-China trade dispute, which now looks increasingly likely, would only improve the situation. Under such circumstances, it makes good sense to invest in select manufacturing stocks.

Multiple Metrics Show Improvement

The ISM manufacturing index increased from February’s reading of 54.2% by 1.1% to hit 55.3% in March. In February, the index had plummeted to its lowest level since November 2016. The March reading is also higher than the estimated level of 54.5%.

The new orders index increased by 1.9% from February’s level of 55.5% to hit 57.4%. Meanwhile, the production index increased from 54.8% by 1% to touch 55.8%. Additionally, the prices index increased by 4.9% to 54.3%, clearly indicating a hike in input prices for the first time since December 2018.

Notably, the metric for employment increased by 5.2% to hit 57.5%, emerging as the largest contributor to the improvement in the reading witnessed in March. This was the largest increase in three years, bringing an end to three consecutive months of declines.

Construction Spending, Uptick in China Manufacturing Raise Optimism

Meanwhile, construction spending increased 1% to hit a nine-month high in February. This follows an upwardly revised increase of 2.5% in January and marks the third straight month of gains.

Improvements were witnessed in both private and public construction, raising optimism about the economy after a clutch of disappointing economic reports. The index also increased 1.1% year over year, negating the projection of a decline of 0.1%.

Optimism about the global economy also increased after a private survey indicated on Apr 1 that China’s manufacturing activity had improved in March. The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) increased from 49.9 in February to 50.8 in March. The expansion was the fastest pace witnessed in eight months.

The report comes on the heels of Apr 31’s official figures, which also indicate that China’s manufacturing sector improved in March. The official Purchasing Managers’ Index recovered from February’s three-year low of 49.2 to hit to 50.5 in March. This marks the first expansion in four months.

Our Choices

Economists and market watchers believe that fresh ISM data on manufacturing indicates America’s economic expansion is unlikely to end in the near term. Such a view is bolstered by February’s bullish construction spending numbers.

Meanwhile, the latest manufacturing data out of China indicates that the corrective measures being taken by the Xi administration are proving to be effective. This also negates fears of a worldwide slowdown, especially at a time when a U.S.-China trade deal seems tantalizingly close.

Investing in domestic manufacturing stocks seems prudent at this time. We have narrowed down our search based on a Zacks Rank #1 (Strong Buy) and other relevant metrics. You can see Zacks Investment Research

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Written By: Zacks Investment Research