ISM Manufacturing Index

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.

• 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, 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.

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.

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.

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

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.

This article is a guide to What is ISM Manufacturing Index and its meaning. Here, we explain its impact, chart, calculation, and an example. You can also go through our recommended articles on corporate finance –

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