What is the ISM manufacturing index?

ISM manufacturing index stands for the Institute for Supply Management index. Established in 1915, ISM was the first professional non-profit supply management organisation. Based in Tempe, Arizona, US, ISM has over 50,000 members across 100 countries.

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 report is published on the first business day of the month. As a result, it’s one of the first economic indications that investors and business people get every month.

According to the ISM: “The ISM® Report On Business® – Manufacturing (PMI®) and Services (PMI®) – are two of the most reliable economic indicators available, providing guidance to supply management professionals, economists, analysts, and government and business leaders. The reports are issued by the ISM Manufacturing and Services business survey committees.”

How is the ISM Manufacturing Index calculated?

ISM asks purchasing managers about their operation's general situation (increasing, decreasing or stagnating), new orders, inventories (their own and customer inventories), employment, order backlogs, supplier deliveries, exports, imports and prices.

However, only five components comprise the composite index: new orders, production, employment, supplier deliveries and inventories (their own, not customer inventories). Each of the five categories has a 20% weighting.

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).

Survey responses are divided into 16 manufacturing industries, including furniture and related products, computer and electronic goods, apparel and transportation equipment.

How to read the ISM manufacturing index?

The ISM Manufacturing Index shows whether manufacturing and the economy as a whole are expanding or contracting.

According to the ISM: “A Manufacturing PMI® reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. A Manufacturing PMI® above 43.1 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 43.1 percent, it is generally declining. The distance from 50 percent or 43.1 percent is indicative of the extent of the expansion or decline.”

The ISM index has a significant impact on investor and corporate confidence because it‘s based on a poll of executives in charge of their companies’ supply chains. Purchasing managers are key people to consider when assessing the ebb and flow of company conditions.

Investors can better understand national economic trends and circumstances by tracking the ISM. A rising level of the ISM manufacturing Index means a healthy manufacturing sector that could bode well for corporate earnings and the stock market. On the contrary, bond markets may fall when the ISM manufacturing index increases due to bonds' sensitivity to inflation.

ISM has calculated and published the monthly index since 1931, except for a four-year break during World War II.