Understanding the ISM Manufacturing Index: Key to U.S. Economic Trends

What Is the ISM Manufacturing Index?

The ISM manufacturing index, also known as the purchasing managers' index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at manufacturing firms nationwide. It is considered to be a key indicator of the state of the U.S. economy. Formally called the Manufacturing ISM Report on Business, the survey is conducted by the Institute for Supply Management (ISM).

Detailed Analysis of the ISM Manufacturing Index

The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month. The report is released on the first business day of each month. Thus, it is one of the earliest indicators of economic activity that investors and business people get regularly.

The ISM manufacturing index is a composite measure equally weighing new orders, production, employment, supplier deliveries, and inventories. Each factor is seasonally adjusted.

The ISM Report on Business includes three distinct purchasing managers indexes from surveys. 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. A hospital's PMI is released on the fifth business day of the month. The Institute also releases a Semi-Annual Economic Forecast in May and December.

Practical Applications of the ISM Manufacturing Index

Monitoring the ISM index helps investors grasp national economic trends and conditions. When the index rises, investors expect a bullish stock market due to higher corporate profits.  In contrast, bond markets may drop as the ISM index rises due to bonds' sensitivity to inflation.

Monthly ISM manufacturing index announcements can significantly impact investor and business confidence. This is because the index is a survey of purchasing managers and supply management executives who are at the forefront of their companies' supply chains.

Purchasing managers are best positioned to assess business conditions. The manufacturers they work for must respond quickly to changes in demand, ramping up or scaling back purchases of materials they use in anticipation of demand for their finished products.

An index over 50 signals manufacturing expansion, 50 shows no change, and below 50 indicates contraction.

How the ISM Manufacturing Index is Structured

The ISM survey is broadly diversified across industries based on the North American Industry Classification System (NAICS), which is weighted by each industry's share of U.S. gross domestic product (GDP). Survey responses are delineated into 18 industry sectors, such as chemical products, computer and electronic products, and transportation equipment.

Survey respondents indicate whether their organization's activities 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.

For each category, a diffusion index is calculated by adding the percentage of increases to half of the percentage reporting no change. 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.

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

Interpreting ISM Manufacturing Index Data

At the beginning of June 2024, the ISM released the series index information for May 2024. The monthly report compared series data from April 2024. Index information from the report is below.

The first three columns from the report indicate the most recent findings from the survey as well as the month-over-month change in each index. 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 May, the manufacturing sector in the U.S. contracted for the second consecutive month, after the contraction seen in April 2024. Before April, March witnessed an expansion, which ended a 16-month streak of contractions.

The Bottom Line

The ISM Manufacturing Index, a crucial economic indicator compiled by the Institute for Supply Management, provides insight into the U.S. economy's health by tracking manufacturing trends. By assessing changes in production, new orders, employment, supplier deliveries, and inventories, it presents a comprehensive picture of manufacturing sector dynamics.

A PMI above 50 indicates expansion, while below 50 signifies contraction. As such, investors and business leaders closely monitor these monthly reports to inform their strategies and anticipate market shifts.