What Is the ISM Manufacturing Index?
The ISM Manufacturing Index, also referred to as the Purchasing Managers’ Index (PMI), is a vital monthly measure of U.S. economic activity. It captures insights from purchasing managers at over 300 manufacturing firms and is considered a crucial gauge of the U.S. economy’s overall health. Formally known as the Manufacturing ISM Report on Business, this survey is instrumental in understanding demand levels in various industries.
Key Highlights
- The ISM Manufacturing Index is a leading indicator of the U.S. economy, reflecting demand through factory orders.
- Announced on the first business day each month, the PMI can significantly influence investor and business sentiment.
- The comprehensive report details new orders, production, employment, inventory, prices, and backlogs.
- In December 2022, the November report revealed the first contraction in 29 months.
What Does the ISM Manufacturing Index Measure?
The ISM Manufacturing Index assesses production changes month over month across the U.S. Economy. Released on the first business day of each month, it serves as one of the earliest data points for gauging economic activity. The index is a composite of five equal-weight components: new orders, production, employment, supplier deliveries, and inventories, all seasonally adjusted.
Besides the manufacturing PMI, the ISM releases a Services PMI and a Semi-Annual Economic Forecast. The manufacturing PMI gives an idea of sector growth or contraction based on a scale where reading above 50 signifies expansion and below 50 indicates contraction.
The Power of Monitoring the ISM Manufacturing Index
By closely watching the ISM Manufacturing Index, investors can gain a clearer understanding of national economic trends. An upward trend on the index heralds a bullish stock market driven by higher corporate profits. Conversely, bonds may falter as the ISM Index rises because of their sensitivity to inflation.
The index holds sway over investor and business decisions as it reflects insights from purchasing managers who function on the frontline of supply chains. These experts are best positioned to evaluate shifts in business conditions and materials purchasing trends in reaction to demand for finished products.
Constructing the Index
The ISM survey spans a diverse array of industries classified under the North American Industry Classification System (NAICS). Responses are grouped into sectors like chemical products, computer electronics, and transportation equipment. Respondents are queried about upticks, declines, or stagnancy in areas such as new orders, production, employment, deliveries, and inventories, from which a diffusion index is then calculated.
The ISM Manufacturing Index is a composite score derived equally from new orders, production, employment, supplier deliveries, and inventories, weighted at 20% each.
Real-World Example of ISM Manufacturing Index
In December 2022, the ISM reported series index information for November 2022. Key indices from the report were as follows:
| Index | Nov 2022 | Oct 2022 | Change | Direction | Rate of Change | Trend (Months) |
|---|---|---|---|---|---|---|
| Manufacturing PMI | 49.0 | 50.2 | -1.2 | Contracting | From Growing | 1 |
| New Orders | 47.2 | 49.2 | -2.0 | Contracting | Faster | 3 |
| Production | 51.5 | 52.3 | -0.8 | Growing | Slower | 30 |
| Employment | 48.4 | 50.0 | -1.6 | Contracting | From Unchanged | 1 |
| Supplier Deliveries | 47.2 | 46.8 | +0.4 | Faster | Slower | 2 |
| Inventories | 50.9 | 52.5 | -1.6 | Growing | Slower | 16 |
| Customer Inventories | 48.7 | 41.6 | +7.1 | Too Low | Slower | 74 |
| Prices | 43.0 | 46.6 | -3.6 | Decreasing | Faster | 2 |
| Backlog of Orders | 40.0 | 45.3 | -5.3 | Contracting | Faster | 2 |
| New Export Orders | 48.4 | 46.5 | +1.9 | Contracting | Slower | 4 |
| Imports | 46.6 | 50.8 | -4.2 | Contracting | From Growing | 1 |
This report highlighted contraction for the first time since May 2022, breaking a 29-month growth streak in manufacturing.
Current State of the ISM Manufacturing Index
As of November 2022, the ISM Manufacturing PMI stood at 49.00.
Release Schedule of ISM Data
The ISM Manufacturing Report on Business is published on the first business day each month at 10:00 AM EST. The Services Report follows on the third business day at the same time.
How to Interpret PMI Data
The PMI states figures to show whether the manufacturing sector is expanding or contracting. A reading above 50 means growth, while a reading below 50 indicates contraction.
Is ISM a Leading Indicator?
Indeed, the ISM PMI is viewed as a leading indicator of economic trends. Besides offering immediate past months’ data, it provides longer-term trends rooted in economic conditions.
Conclusion
The ISM Manufacturing PMI Report offers critical insights into economic trends through its monthly assessments of the manufacturing sector. These comparisons reveal whether key manufacturing activities are growing or contracting and indicate the direction of economic activity via inputs from top manufacturing firms.
Related Terms: North American Industry Classification System, gross domestic product, diffusion index, bond markets, product demand, supply management.
References
- Institute for Supply Management. “Manufacturing PMI at 49%, November 2022 Manufacturing ISM Report On Business”.
- Institute for Supply Management. “Report Release Date Calendar”.
