What Is the ISM Manufacturing Index?

What Is the ISM Manufacturing Index?

Let me explain the ISM manufacturing index to you directly—it's also called the purchasing managers' index or PMI, and it's a monthly indicator of U.S. economic activity drawn from surveys of purchasing managers at manufacturing firms across the country. I consider it a key gauge of the overall U.S. economy's state. Officially, it's the Manufacturing ISM Report on Business, put together by the Institute for Supply Management (ISM).

Key Takeaways

Here's what you need to know upfront: the ISM Manufacturing Index, or PMI, serves as a vital monthly measure of U.S. economic activity based on those surveys of manufacturing purchasing managers. If the PMI reads above 50, it points to growth in the manufacturing sector compared to the prior month, but below 50 means contraction. The index gives equal weight to five main components—new orders, production, employment, supplier deliveries, and inventories. Remember, this ISM report comes out as one of the first economic indicators each month, which directly affects investor and business confidence.

Detailed Analysis of the ISM Manufacturing Index

Diving deeper, the ISM manufacturing index or PMI tracks month-to-month changes in production levels throughout the U.S. economy. You get this report on the first business day of every month, making it one of the earliest pieces of economic data that investors and business folks like you receive regularly.

This index is a composite that equally weighs new orders, production, employment, supplier deliveries, and inventories, with each factor adjusted for seasonal variations.

The ISM Report on Business actually covers three separate purchasing managers indexes from their surveys. Beyond the manufacturing PMI, there's a services PMI for the non-manufacturing sector, released on the third business day of the month, and a hospital PMI on the fifth. Plus, the Institute puts out a Semi-Annual Economic Forecast in May and December.

Practical Applications of the ISM Manufacturing Index

When you monitor the ISM index, it helps you understand national economic trends and conditions. If the index goes up, expect a bullish stock market because corporate profits tend to rise. On the flip side, bond markets might fall as the index climbs, given bonds' sensitivity to inflation.

Those monthly announcements from the ISM can really shake up investor and business confidence. That's because the survey targets purchasing managers and supply executives who are right at the front lines of their companies' supply chains.

These purchasing managers are in the best spot to judge business conditions. The manufacturers they serve have to react fast to demand shifts, either ramping up or cutting back on material purchases based on expected demand for finished products.

Simply put, an index over 50 means manufacturing is expanding, 50 indicates no change, and below 50 shows contraction.

How the ISM Manufacturing Index is Structured

The ISM survey spreads broadly across industries using the North American Industry Classification System (NAICS), weighted by each industry's GDP share. Responses break down into 18 sectors, like chemical products, computer and electronic products, and transportation equipment.

Respondents tell whether their organization's activities are increasing, decreasing, or unchanged in areas such as new orders, production, employment, supplier deliveries, inventories, customers' inventories, commodity prices, order backlog, new export orders, and imports.

For each category, they calculate a diffusion index by adding the percentage of increases to half the percentage of no changes. The overall composite manufacturing index comes from equal 20% weights on five question categories: new orders, production, employment, supplier deliveries, and inventories.

The PMI has been calculated and released monthly since 1948 by the ISM, which is a not-for-profit professional association.

Interpreting ISM Manufacturing Index Data

At the start of June 2024, the ISM released the index data for May 2024, comparing it to April. In May, the manufacturing PMI was 48.7, down 0.5 points from April's 49.2, indicating faster contraction for the second month in a row. New orders dropped to 45.4 from 49.1, a 3.7-point decline, contracting faster. Production was at 50.2, down 1.1 from 51.3, still growing but slower. Employment rose to 51.1 from 48.6, up 2.5 points, shifting to growth. Supplier deliveries stayed at 48.9, faster with no change. Inventories fell to 47.9 from 48.2, contracting faster. Customers' inventories were 48.3, up 0.5 from 47.8, still too low but slower. Prices dropped to 57.0 from 60.9, increasing but slower. Backlog of orders was 42.4, down 3.0 from 45.4, contracting faster. New export orders rose to 50.6 from 48.7, up 1.9, now growing. Imports were 51.1, down 0.8 from 51.9, growing slower.

The report's first columns show the latest survey findings, month-over-month changes, direction, rate of change, and trends in months. In May, U.S. manufacturing contracted for the second straight month after April's contraction, following a brief expansion in March that broke a 16-month contraction streak.

What Is the Current ISM Manufacturing Index?

As of May 2024, the U.S. ISM Manufacturing PMI stands at 48.7%.

When Is ISM Data Released?

The ISM Manufacturing Report on Business comes out on the first business day of each month at 10:00 a.m. EST. The Services report follows on the third business day at the same time.

How Do I Read PMI Data?

Reading PMI data is straightforward: the number tells you if the manufacturing sector is growing or contracting. Over 50 means growth from the previous month, under 50 means contraction.

Is ISM a Leading Indicator?

Yes, ISM PMI data acts as a leading indicator of economic trends. It covers the prior two months and highlights long-term trends based on current conditions.

The Bottom Line

To wrap this up, the ISM Manufacturing Index from the Institute for Supply Management is a critical economic indicator that gives you insight into the U.S. economy's health by tracking manufacturing trends. It looks at changes in production, new orders, employment, supplier deliveries, and inventories for a full view of sector dynamics. A PMI above 50 means expansion, below 50 means contraction, so investors and leaders like you watch these monthly reports closely to guide strategies and predict market moves.