The ISM Manufacturing Survey, formally known as “Manufacturing ISM ® Report On Business” is based on responses from purchasing managers in the manufacturing sector.
The report monitors activity in production, new orders, supplier deliveries, inventory, employment, prices, imports, and exports.
It’s the first piece of news on the economy every month and provides the earliest clues of how the economy has fared during the previous four weeks.
What is the ISM Manufacturing Survey?
The ISM Manufactury Survey is a monthly indicator of the health of U.S. manufacturers based on a survey of purchasing managers.
Each month, the Institute of Supply Management (ISM) surveys purchasing managers about the current condition of their businesses and publishes a report.
Institute for Supply Management is the oldest, and the largest, supply management association in the world.
The ISM selects companies that represent the industry and geographic distribution of U.S. manufacturers for its surveys.
The survey questions require purchasing managers to answer “better, worse, or the same” or “increase, decrease, or no change.”
The ISM takes the answers to each question into a diffusion index, which has a scale that ranges from 0 to 100, with 50 as its midpoint.
- If the index is above 50, there were more answers of “better” or “increasing” compared to those who answered, “worse” or “decreasing”.
- If the index is below 50, there were more answers of “worse” or “decreasing” compared to those who answered, “better” or “increasing”.
Why is the ISM Manufacturing Survey important?
People in charge of buying stuff for their company are called purchasing managers.
Manufacturing companies need supplies to make products. A sample of items they might order includes cables, packing boxes, and computers.
Purchasing managers keep up with new customer orders. They make sure that the factory has a sufficient inventory of materials to keep production operating on schedule.
They’re also knowledgeable about commodity pricing, availability of supplies, and delivery times for raw materials used in production.
If there’s an increase in demand for manufactured products, purchasing managers respond by increasing orders for production materials and other supplies.
If manufacturing sales slow, these corporate buyers will cut back on industrial orders.
Because of their position, you can essentially get a solid measure of manufacturing activity by following what purchasing managers are doing.
This is important because manufactured goods make up almost half of the total economy.
The ISM Manufacturing Survey has a strong history of anticipating manufacturers’ profits before other economic reports and is used to predict turning points in the economy.
How is the ISM Manufacturing Survey calculated?
The ISM mails out questionnaires every month to about 400 member companies around the country, representing 20 different industries.
Corporate purchasing managers are asked to assess if activity is rising, falling, or unchanged in the following fields:
- New orders: Measures the change in order quantities from the previous month.
- Production: Reports production levels compared to the previous month.
- Employment: Reports the rate or increase or decrease of overall employment levels compared to the previous month.
- Supplier deliveries: Asks whether suppliers are delivering materials quicker or slower compared to the previous month.
- Inventories: Measures increases or decreases in manufacturers’ inventory levels compared to the previous month.
- Customers’ inventories: Measures the inventory levels of manufacturing customers.
- Commodity prices: Reports rising or falling prices for raw materials.
- Backlog of orders: Reports whether order backlogs are growing or shrinking.
- New export orders: Measures the level of orders provided outside the U.S. compared to the previous month.
- Imports: Measures the rate of change for raw material imports compared to the previous month.
The PMI serves as the headline index and provides an overall view of the manufacturing sectors.
Before September 1, 2001, “PMI” stood for Purchasing Managers’ Index. ISM now uses only the acronym, PMI, due to ISM’s name change.
The index is a compilation based on the answers to the first five queries in the above list.
They are weighted as follows to compute the index: order (30%), manufacturing production (25%), employment (20%), supplier deliveries (15%), and inventories (10%). The bottom five provide additional coverage of how manufacturing is performing.
When is it released?
The ISM Manufacturing Survey is released on the first business day of each month at 10:00 am ET.
How do you read it?
Here is how you interpret the results:
Above 50: Both manufacturing and the economy are expanding.
Below 50 but above 43: Manufacturing activity is contracting, yet the overall economy may still be growing.
Below 43 on a sustained basis: Both manufacturing and the economy are likely to be in recession. Expect the Fed to lower rates to try and stimulate economic growth.
How does it affect the forex market?
A PMI reading above 50 is bullish.
A trend of rising PMI values usually means a growing economy. Economic growth usually leads to higher interest rates, which is bullish for the U.S. dollar.
A PMI reading below 50 is bearish.
A trend of falling PMI values usually means a slowing economy. Economic decline usually leads to lower interest rates, which is bearish for the U.S. dollar.