The stock market has risen slightly within the past few days thanks to manufacturing’s recent fast-paced expansion.
Factory activity increased at its fastest pace in nearly four years this February, according to Markit’s preliminary U.S. Manufacturing Purchasing Managers Index.
But to understand why the rise in the stock market is important, we need to understand why stock prices rise and fall. As many kids learned in high school economics, when a supply is in shortage, people will pay more for it. It’s supply and demand.
Stocks usually rise after a company releases news about a new product line or management change and the response to the change is positive. And if the response is negative, the stocks will fall.
This rise was such a big surprise to investors because in January, United States manufacturing reports showed that manufacturing was moving at a much slower pace than expected (factory activity was at an eight-month low).
When factory activity is stuck in a rut, this means that the demand for a product is low (i.e. there isn’t anyone buying). But on the flipside, when activity is high, inventory is low because people are buying.
Manufacturing actually plays a big role in stock prices—something not recognized by many passive onlookers. At first glance, supply and demand seem to rest on the shoulders of the entire economy, rather than the many factories that make and produce the products that the country relies on.
Understanding the stock market is a bit of a scary and daunting task, but it’s still very interesting to see manufacturing’s continued effect on the stock market. And as we saw with the rise in the stock market last week thanks to increased factory activity, the positive effects on the stock market can be felt across the country. Manufacturing really is a critical part of the American economy.