ISM Manufacturing Index

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21 Aug, 2024

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ISM manufacturing index refers to a statistical measure indicating the economic activity of the manufacturing sector in the United States. It is based on a survey conducted on purchasing managers from manufacturing firms.

It is also known as ISM Manufacturing Purchasing Managers Index (PMI). The ISM stands for Institute of Supply Management. The data releases monthly and hints at the state of the economy, influencing investors and businesses and their decisions.

What is ISM Manufacturing Index

ISM manufacturing index definition refers to an economic indicator that measures the growth in the manufacturing sector in the United States.
It is calculated by assigning equal weightage to the most important components, such as new orders, production, inventories, employment, and supplier deliverables.
A reading above 50 indicates the expansion in the manufacturing sector that pushes up the stock market and is a positive indicator for the economy. In contrast, a reading below 50 indicates a contraction in the manufacturing sector.

ISM Manufacturing Index Explained

ISM manufacturing index, or PMI, introduced by the ISM in 1948, is a useful resource for identifying the expansion and contraction phase or scenario in the manufacturing sector. The index helps analysts, investors, economists, and businesses gauge manufacturing activity and associated economic growth. It also helps professionals understand existing and future business situations. At 10:00 a.m. (EST) on the first business day of each month, the Manufacturing ISM Report on Business is made public.

In addition, ISM releases data like the ISM Services PMI and the ISM Hospital PMI. All these data primarily depend on the data collected by the Business Survey Committee surveying the supply management professionals. The committee's composition is established based on the industry category and each industry's contribution to the GDP. A secure website allows survey participants to submit their answers.

Confidentiality is maintained in the process. Also, the respondents are urged to consult with others in their company while filling out the survey. Also, for the Semiannual Economic Forecast reports that are made public in May and December, survey respondents must provide more comprehensive responses two times a year.

How Is the ISM Manufacturing Index Calculated?

The information like business conditions and variables from purchase managers helps analyze the production levels across the United States economy.

The survey is conducted based on ten specific domains:

New Orders
Production
Employment
Supplier Deliveries
Inventories
Customers' Inventories
Prices
Backlog of Orders
New Export Orders
Imports

The five core elements of the index (orders, production, employment, supplier deliverables, and inventories) are assigned equal weightage to contribute to ISM manufacturing PMI. Each category has a 20% weightage.

PMI above 50 indicates an expansion in the manufacturing sector. Conversely, PMI below 50 indicates a contraction in the manufacturing sector. PMI remaining the same indicates no change in the manufacturing sector.

Impact

Investors' confidence increases when the index value rises and bullish trends or market rallies happen in the equity or stock market. So it indicates the positive correlation between the ISM report and the uptrend in the stock market. In contrast, the bond market falls or exhibits a downtrend in response to the high index value. There exist an important role for ISM manufacturing PMI in forex trading also. For example, If the PMI value is rising compared to the previous month US dollar rally occurs in the market. All of these explain how the index influences investors and businesses.

Chart

The following ISM manufacturing index chart is from the ISM website. The ISM manufacturing index data disclose economic direction, factors like production, supplier deliveries, and inventories contributing to the manufacturing PMI.

According to the July 2022 Manufacturing ISM Report on Business data, the five sub-index levels were as follows:

New Orders: 48
Production: 53.5
Employment: 49.9
Supplier Deliveries: 55.2
Inventories: 57.3

Therefore, as per the 20% weightage for each sub-index, the PMI reading was 52.8%.

Based on the data from the ISM official website, eleven manufacturing industries reported growth in July, and they are:

Apparel, Leather & Allied Products
Nonmetallic Mineral Products
Petroleum & Coal Products
Printing & Related Support Activities
Computer & Electronic Products
Transportation Equipment
Machinery
Textile Mills
Primary Metals
Plastics & Rubber Products
Electrical Equipment, Appliances & Components.

The seven industries that faced contraction in July compared to June are the following:

Wood Products
Furniture & Related Products
Paper Products
Miscellaneous Manufacturing
Fabricated Metal Products
Food, Beverage & Tobacco Products
Chemical Products

Example

Let us look at the ISM Manufacturing PMI historical data to understand the concept better:

The indicator, which tracks and determines the percentage of manufacturing entities experiencing growth for the month, reads 52.8 in July 2022. The figure was somewhat lower than the 53 reading from June but slightly higher than the Dow Jones projection of 52.1.
The chart shows that the average value of the Manufacturing PMI from August 2021 to July 2022 is 57.6. The chart's highest growth during the period portrayed occurred in October 2021, and the low value occurred in July 2022.

Frequently Asked Questions (FAQs)

What is the US ISM manufacturing PMI?

In the United States, it was also known as the ISM Purchasing Managers Index (PMI), a monthly survey of purchasing managers from around 300 manufacturing companies. The Institute for Supply Management releases the corresponding monthly report, pointing to the economic activity and its direction every month.

What is the ISM non-manufacturing index?

ISM non-manufacturing index is an economic index based on surveys of purchasing and supply executives from over 400 non-manufacturing businesses. The survey is a component of the ISM Report on Business -Manufacturing and Services.

What does the ISM manufacturing index measure?

The Manufacturing PMI highlights whether the sector and US economy are booming. If the reading is above 50%, the manufacturing economy is rising. If the reading falls below 50%, it indicates a shrinking manufacturing economy. If the manufacturing PMI is greater than 48.7% over a while, traditionally, it denotes the overall economic growth.