Leading Macro Indicators: ISM Manufacturing PMI, Retail Sales and GDP

Payrolls and inflation get the most attention, but a trader trying to understand where an economy stands uses a wider set of data. Three recurring US releases fill in the picture: a survey of manufacturers, a report on consumer spending, and the broadest measure of output, gross domestic product. They arrive at different speeds and are revised differently, which affects how much weight each deserves.

This article explains what each one measures, when it is published, and how traders read it. It does not quote current readings, because those change every month. The official sources named at the end publish the latest figures and calendars.

ISM Manufacturing PMI: a survey, not a count

The Institute for Supply Management (ISM) surveys purchasing and supply executives at manufacturing companies each month and publishes the Manufacturing Purchasing Managers' Index, or PMI. The headline PMI is built from five subindexes with equal weights: new orders, production, employment, supplier deliveries and inventories.

The PMI is a diffusion index. Respondents say whether each item is higher, the same or lower than the previous month, and the results are converted to a scale where 50 means no change. A reading above 50 indicates that manufacturing is expanding compared with the previous month, and below 50 indicates contraction. It is a direction signal, not a measure of how big the sector is.

The line at 50 is neutral for manufacturing, but not the same as the line for the whole economy. ISM itself says that a PMI above a level a little lower than 50 is consistent with growth in overall GDP over time. The exact figure is published in ISM's report and has varied between about 42 and 44 over the years, so use the report rather than a remembered number. Claims that a particular reading, such as 42.5, signals recession are conventions, not official rules.

ISM publishes the report on the first business day of the month at 10:00 a.m. Eastern, according to its own release calendar, which is worth checking because dates move around weekends and holidays. Because it is a survey, it appears before hard data for the same month, which is why it is classed as a leading indicator. Traders also read the subindexes. New orders look forward, while supplier deliveries are counted in a counterintuitive way: slower deliveries add to the index, because they usually signal strong demand, though they can also reflect supply disruptions. Check the report rather than assume.

US retail sales: spending in dollars

The Census Bureau publishes the Advance Monthly Retail Trade Report, normally at 8:30 a.m. New York time around the middle of the month. It estimates sales at retail stores, online sellers and food services, and it is based on a sample, so it is revised: each release restates the previous month, and annual revisions can follow.

• Nominal, not real. Retail sales are measured in dollars and are not adjusted for price changes. A rise can come from higher prices as much as higher volumes, so read it next to inflation data.
• Headline versus excluding autos and gasoline. Car sales and fuel prices are volatile, so traders often compare the headline with a measure that leaves them out.
• The control group. This is a narrower measure that leaves out volatile categories such as autos and gasoline. Check the exact definition in the release.

Consumer spending is the largest part of US GDP, at roughly two thirds. That does not mean retail sales are two thirds of GDP. Retail sales cover mostly goods, while a large share of consumer spending goes on services such as housing, health care and travel, which the retail sales report does not cover. It is one input, not the whole.

GDP: the broadest measure, in three estimates

Gross domestic product is the value of the final goods and services produced in the economy. In the standard expenditure view it is the sum of four parts.

Here C is consumer spending, I is investment, G is government spending and X minus M is exports less imports. The US Bureau of Economic Analysis (BEA) publishes it quarterly, and growth is reported at an annualised rate: the quarter's change is expressed as if it continued for a full year. A quarterly rise of 0.5% is therefore reported as roughly 2%.

BEA releases three estimates for each quarter, normally at 8:30 a.m. New York time.

The advance estimate gets the most market attention because it is first, but it is also the least complete. Later figures can differ materially, and annual updates can change them again. For trading, this means the advance number is a headline event while the revised figures matter more for those studying the economy. Check the BEA release schedule for the dates.

Putting the three together

The three indicators run on different clocks. A survey such as the PMI reports sentiment and direction early. Retail sales show what households actually spent, with a delay of about a month. GDP confirms the total, but only after the quarter is over and with revisions to follow. Traders use them as a sequence: a survey that weakens may be the first hint of a slowdown, and spending and output data show whether it came through.

Their effect on currencies runs through interest rate expectations, as covered in how central banks influence forex prices. Strong growth can raise expectations of higher rates, which tends to support a currency. Weak growth can have the opposite effect. As with any release, the surprise relative to the forecast matters more than the level, and the details and revisions can change the first reaction. See how to read the economic calendar for how to check forecasts, previous figures and measurement.

Two small worked examples

Retail sales in real terms: suppose nominal retail sales rise 0.5% in a month while consumer prices over the same period rise 0.3%. Roughly, the volume of goods bought rose about 0.2%, not 0.5%. The approximation is not exact, because retail sales cover only part of what consumers buy and the price index covers a different basket, but it shows why a strong nominal figure can be less impressive once inflation is taken into account.

Reading a PMI: suppose the headline PMI is 49 while new orders are 52 and inventories are 46. The headline says manufacturing is shrinking slightly overall, while the new orders subindex says demand is picking up, and the low inventory reading drags the headline down. A trader would note the mixed message and wait for the next month and for the hard data before concluding that the trend has turned. These figures are invented for illustration and are not a reading of any actual report.

A caution about indicators

• No single indicator tells you where the cycle is. Read several together and expect them to disagree.
• Surveys and hard data can diverge for months. A survey measures opinion, while spending data measures activity.
• Revisions can change the story. First estimates of retail sales and GDP are both restated later.
• A good number is not a good trade. Prices move on the surprise, and spreads and slippage are worst around these releases. Position sizing is covered in leverage and margin.

Trading around data releases carries a high risk of loss, especially with leverage. This article is education, not advice, and it does not predict how any release will turn out.

Sources: Institute for Supply Management, Manufacturing PMI report and methodology; US Bureau of Economic Analysis, GDP learning materials and release schedule; US Census Bureau, Advance Monthly Retail Trade Report; Conference Board, leading, coincident and lagging indexes.