ISM Manufacturing Index Overview, How it Works

The PMI index is reported as a number—above 50 represents growth or expansion while below 50 represents a contraction. The report also shows the industries that experienced growth in business activity compared to the prior month while showing which industries contracted. The ISM Manufacturing Index, commonly known as the ISM Manufacturing Purchasing Managers Index (ISM PMI), is a monthly gauge of the level of economic activity in the manufacturing sector in the United States versus the previous month. Formerly known as the purchasing managers index (PMI), the ISM manufacturing index measures the condition of the US economy based on a monthly poll of purchasing managers in over 400 manufacturing companies. The ISM report has several components that measure business growth or contraction, as well as many other factors that go into the supply management process.

  1. The composite manufacturing index is calculated by taking an equal 20% weighting for five categories of questions on new orders, production, employment, supplier deliveries, and inventories.
  2. This report details month-over-month changes in growth or contraction in addition to reporting how long each index has been moving in its current direction.
  3. A weak US ISM Non-Manufacturing number usually leads to a dollar sell-off and a rise in the Euro.
  4. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss in a down market.

PMI serves as a leading economic indicator for the level of economic activity in the manufacturing sector. It could also be used to predict the movement of the economy, and thus the stock market, if combined with other economic indicators. The ISM Manufacturing Index is published monthly and is an important leading indicator of the U.S. economy. The reason that this economic indicator is forward-looking is how far ahead purchasing decisions need to be made for future manufacturing needs. As such, it is widely followed by economists, analysts, government, business leaders, and supply management professionals. The Purchasing Managers Index is a diffusion index summarizing economic activity in the manufacturing sector in the US.

In addition to the manufacturing PMI, the ISM produces a services PMI, for the non-manufacturing sector, which is released on the third business day of the month. The Institute also releases a Semi-Annual Economic Forecast in May and December. The Institute for Supply Management (ISM) measures the economic activity from both the manufacturing side as well as the service side.


Weights reflect both company size and the relative
importance of the sub-sector in which the company operates. A large
company in a large sector will therefore account for a
proportionally higher weight in the survey results than a small
company in a smaller sector. We understand that ISM surveys do not
include such a weighting process in the calculation of the results
but are instead dependent on the panels being ‘self-weighting’. Thus, unlike S&P Global, as far
as we can ascertain, ISM does not disclose actual numbers of
questionnaires received, making It more difficult to conduct due
diligence on data quality. The ISM definition therefore includes construction, utilities,
agriculture, retail and various aspects of government
administration (see table), many of which can blur, dampen or
distort the picture of the health of the services economy. Public
sector activity, in particular, will tend to dampen any business
cycle trend, especially any downturn in private sector activity,
hence its exclusion from the S&P Global survey.

Chamber of Commerce organized a committee to gather pertinent business data from companies that were members of the Chamber. However, after many attempts efforts to gather this information, the committee disbanded in June 1931. Note also that the S&P coverage is consistent with all
services PMI in other countries, ensuing international
comparability. The wider ISM definition which includes non-services
companies in the services PMI means any international comparisons
are potentially misleading. Overall, an ISM PMI number above 50 indicates that the economy is expanding and is healthy.

ISM was formed in 1915 and is the first management institute in the world with members in 300 countries. The data gleaned from its large membership of purchasing managers means ISM is a reliable guide to global economic activity, and as a result, currency prices. A country’s economy is often determined by its supply chain, as a result, the monthly ISM manufacturing and non-manufacturing PMI economic news releases are carefully watched by forex traders around the world. The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month. Thus, it is one of the earliest indicators of economic activity that investors and business people get regularly. When the business activity index is increasing, investors might infer that the stock markets should increase because of higher expected corporate profits.

Survey panel sizes

Employment activity in the services sector is measured on a monthly basis. However, the report also provides insight as to the level of tightness in the labor market, meaning whether or not supply managers were able to fill vacant positions with qualified applicants. If there are more jobs than applicants, it can indicate a healthy, growing economy.

A higher-than-expected reading is bullish for the stock market but bearish for the bond market, and the opposite is true. When the index is greater than expected, it bodes well for the stock market because it indicates healthy economic growth, which translates to higher corporate profits. A PMI above 50 indicates an expansion of the manufacturing segment of the economy compared to the previous month. Gross domestic product ( GDP ) is arguably one of the most important economic indicators. Survey responses are divided into 16 manufacturing industries, including furniture and related products, computer and electronic goods, apparel and transportation equipment. The ISM survey is broadly diversified across industries based on the North American Industry Classification System (NAICS), weighted by each industry’s share of US gross domestic product (GDP).

Understanding the ISM Non-Manufacturing Index

Survey respondents are asked whether activities in their organizations are increasing, decreasing, or stagnant. The activities include new orders, production, employment, supplier deliveries, inventories, customers’ inventories, commodity prices, order backlog, new export orders, and imports. The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories. The ISM employment index has now rebounded to 50.5, but this is only indicating very modest hiring and leaves the index in line with its 6M average. It is fine, but certainly not consistent with two consecutive months of 300k+ payrolls.

We and our partners process data to provide:

Economists immediately queried the accuracy of the report and determined that ISM had incorrectly applied seasonal adjustments from the previous month. The surveys use different methods of seasonal adjustment, with
S&P Global PMIs using X13 to estimate seasonal adjustment
factors for the latest numbers every month. ISM, in contrast, uses
a system whereby the coming year’s seasonal adjustment factors are
forecast in advance.

The report also signals the rate of change in addition to longer-term trends (how long each index has been moving in any given direction in terms of months). In this note we look at some of the differences between the two
surveys, which may help explain why the two surveys sometimes
diverge to send different signals on the health of the US service
sector. PMIs are also compiled for Euro zone countries by the Markit Group while US regional and national PMIs are compiled by ISM. As you can see, traders have good reason to pay special attention to the important releases from the ISM manufacturing index. Conversely, if there are more workers looking for work than open positions, it can indicate that economic growth is slowing and unemployment may increase.

The robust headline number of 216,000 led most media commentators to suggest a…– Gold prices fell in Asian trade on Wednesday, relinquishing a measure of recent gains as the dollar rebounded amid some uncertainty over the timing of the Federal Reserve’s interest… This was not available prior to that date because there was insufficient non-manufacturing historical data to develop a composite index. President Herbert Hoover sought information that could help resolve the economic difficulties of the Great Depression.

The Eurozone has large liquid capital markets which can absorb the huge waves of capital seeking refuge from the US. A weak US ISM Non-Manufacturing number usually leads to a dollar sell-off and a rise in the Euro. Another scenario is when the number released is in line with forecasts and/or unchanged from the previous month, then the US dollar may not react at all to the number. Survey respondents are broadly diversified across industries based on the North American Industry Classification System (NAICS). The number of survey respondents within each industry varies depending on that industry’s share of the U.S.

Non-Manufacturing ISM Report On Business

Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. The PMI has been calculated and published monthly since 1948 by the ISM, a not-for-profit professional best forex trading books for beginners association. Stay up to date with all of ING’s latest economic and financial analysis. US ISM Manufacturing PMI is at a current level of 49.10, up from 47.10 last month and up from 47.40 one year ago.

He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The ISM Non-Manufacturing Index is similar, though it covers services instead of products. This index is not as closely followed as its counterpart—it’s not as volatile, usually making it more predictable. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.

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