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HOME > ECONOGUIDE > ISM INDEX
Friday, November 20

The Institute for Supply Management (ISM) reports two separate indexes, one for manufacturing that is released on the first business day of each month, and one for non-manufacturing activity released two business days later. Both indexes relate to the month immediately preceding the release.

The ISM manufacturing index is well established and has proven quite useful for predicting other data released later in the month. The index has five components—employment (20%), production (25%), new orders (30%), inventories (10%), supplier delivery times or vendor performance (15%). Also calculated, but not part of the manufacturing index are export orders, imports and prices paid. The ‘prices paid’ index is frequently given prominence, as it can serve as an early indicator of price pressure. The Federal Reserve pays close attention to this report.

The ISM non-manufacturing index is relatively new and untested, and does not carry the same weight with markets as the manufacturing index. However, with the increasing importance of services to the economy this index is receiving greater attention.

The Chicago PMI, and to a lesser extent the Philadelphia Fed Index, which are released during the relevant month, have proven to be useful predictors for the direction of the ISM. The export orders and imports components of ISM are relevant for the trade balance. The price component provides information for producer prices (PPI) that are released later in the month. Components of the ISM are related to factory orders, industrial production, manufacturing payrolls and inventories.

The key reading of the ISM is whether the index is above or below 50. A reading above 50 indicates expanding manufacturing activity, while a reading below indicates contraction. If the index is 60 or above the pace of expansion is too rapid and cannot be sustained, indicating a turning point in growth. A reading of 45 or below is typically associated with recessions, and represents a bottoming of activity.

The trend is very important. An upward trend may signal growing pressure on inflation that could prompt the Fed to raise interest rates, while a downward trend may signal an easing of inflationary risks, which may allow the Fed to lower interest rates.

The supplier delivery component is useful as an inflation gauge. When delivery times lengthen, bottlenecks and shortages are likely to arise—developments that typically signal the onset of inflationary pressure.
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