Watch PMI New Orders Before the Headline PMI Number

The economic calendar row says “Manufacturing PMI.” Consensus, prior, actual. A reading comes in a point above consensus and index futures twitch. By lunch, most people have moved on. The number worth staying for sits a click deeper in the release, in the table of components, and it’s new orders, because orders placed this month are the production, shipments and revenue of the months after, and none of that has happened yet.

How a diffusion index counts

A purchasing managers’ index comes from a survey. Each month, purchasing managers at a panel of firms say whether a measure, such as new orders, was higher, the same or lower than the month before. Nobody reports a dollar amount. The index turns the answers into one number. At 50, “higher” and “lower” balance.

Here is the sum for a hypothetical panel of 100 firms.

A 55 says improvement was more widespread than decline. It doesn’t say how big. A firm whose orders rose 1% and a firm whose orders rose 40% each count as one “higher” answer, so the index measures how far a change has spread across the panel, and a month in which a few firms saw huge gains while most saw small declines would read below 50 even if total orders rose.

What goes into the headline

The headline manufacturing PMI blends several components: new orders, production, employment, supplier deliveries and inventories. They turn at different points in the cycle.

Production and employment describe what factories are doing now. Inventories describe what’s sitting on the shelves. Supplier deliveries runs backward. Slower deliveries push it up, since a backlog at suppliers usually means strong demand. During a supply disruption, though, deliveries can slow for reasons that have nothing to do with demand, like a port closure or a parts shortage, and that lifts the headline number even in a month when orders are weakening underneath it.

New orders is the forward-looking piece. A purchasing manager placing more orders is betting on future sales. Those orders turn into production and then revenue over the following months, which puts new orders closer than any other component to the numbers that show up in earnings reports.

The spread traders watch

A second reading comes from comparing orders with inventories. Orders outrunning stock on hand mean factories must produce more. Inventories piling up faster than orders mean production is likely to slow.

A positive spread points to more production ahead. A negative one points to a slowdown. A single month’s +3 isn’t much evidence, though. The direction over several months carries more weight than any one reading.

What it changes on your watchlist

The order line matters most for companies whose sales track factory activity. Industrial equipment makers, chemical and materials producers, freight carriers and parts suppliers all sell into the demand that new orders measure, and their own order books tend to rise and fall with it, so a run of improving readings is a reason to look harder at that corner of the market before it shows up in their reported revenue.

It works the other way too. Several months of new orders slipping under inventories is a warning for the same names. Guidance from those companies may soften a quarter or two later. Check which of your holdings sell to manufacturers. The survey speaks to those names most directly. A retailer or a software company selling to households tracks it less closely.

The objection: the headline is what moves the market

A trader could fairly say none of this matters on release day. Markets react to the headline against consensus within seconds. The components get read later, if at all.

On the day, yes. If you trade the first move, the headline is your number. The components matter on a longer clock. A headline held up by slow supplier deliveries while new orders slip is a different economy from one where orders are leading the way up, and over the next few months that difference shows up in company guidance, in sector earnings revisions and eventually in the stocks. Stock pickers holding for months live on that slower clock.

Other releases fill in the picture. Weekly initial jobless claims give a much higher-frequency read on the labor side. How the releases fit together on a week’s schedule is in reading an economic calendar.

Where the survey reading goes soft

A PMI measures how managers feel about their own business. That’s useful, and it’s also a survey, with the limits surveys carry. A panel’s mood can shift on headlines. Managers asked about orders during a scary news week may answer more gloomily than their order books justify.

The numbers also get reworked. PMIs are seasonally adjusted, so a month’s reading depends partly on what the adjustment expects for that time of year, and when seasonal factors are revised, past readings can change after you’ve already acted on them. Small monthly moves deserve little weight.

Treat one month as a hint. Treat a run of months as a signal. Read the new orders line and its spread over inventories before the headline, and trust direction that holds across several releases. The macro course for stock pickers and the economics hub cover how readings like these feed into earnings.