ISM Manufacturing Index

Definition

The ISM Manufacturing Index, also known as the purchasing managers’ index (PMI), is a measure of the economic health of the manufacturing sector in the U.S. It’s compiled by the Institute for Supply Management (ISM) and is based on surveys of more than 300 manufacturing firms. It considers new orders, production, employment, supplier deliveries and inventories to predict future economic activity.

Phonetic

The phonetics of the keyword ISM Manufacturing Index would be: I –  ”ai” (as in “hi” or “fly”),S – “es” (as in “yes” or “less”),M – “em” (as in “them” or “gem”),Manufacturing – “mae – nuh – fak – chuh – ring” (mae as in “map” , nuh as in “nut” , fak as in “fact” , chuh as in “church” , ring as in “ring”),Index – “in – deks” (in as in “bin” , deks as in “decks”). Please note that the phonetics of each word may slightly vary depending on accent or dialect.

Key Takeaways

Here are the three main takeaways about the ISM (Institute for Supply Management) Manufacturing Index:

1. The ISM Manufacturing Index is a monthly economic indicator which represents the overall health of the manufacturing sector. It measures factors like new orders, production, employment, supplier deliveries, and inventories in the United States’ manufacturing industry.

2. A score above 50 in the ISM Manufacturing Index indicates that the manufacturing sector is expanding, while a score below 50 shows that it is shrinking. Thus, it serves as an important tool for investors to understand the prevailing economic conditions.

3. More than being just an indicator for the manufacturing sector, the ISM Manufacturing Index is often considered a leading indicator of the wider economy. This is because manufacturing plays a critical role in the economy and changes in this sector can influence other areas of the economy.

Importance

The ISM Manufacturing Index, compiled by the Institute for Supply Management, is a significant indicator of the economic health of the U.S. manufacturing sector. It is based on surveys of more than 300 manufacturing firms and monitors employment conditions, production levels, new orders, supplier deliveries, and inventories. A reading above 50 indicates expansion in the manufacturing sector, and a reading below 50 indicates contraction. Therefore, the data from this index can significantly influence business strategies, investment plans, and policy decisions. As a closely watched economic barometer, its importance lies in its timely release, sector specificity, and its high correlation with other economic indicators.

Explanation

The ISM Manufacturing Index, also known as the Purchasing Managers’ Index (PMI), serves as a crucial economic indicator. It aims to provide detailed information about the business conditions of the manufacturing sector in the United States. Business analysts, investors, and policy makers use the ISM Manufacturing Index to assess the economy’s overall health since manufacturing often correlates with economic growth. The index, released by the Institute for Supply Management (ISM), is based on a survey of purchasing managers in the manufacturing sector. It is used to anticipate changes in GDP and employment levels. A reading above 50 indicates manufacturing sector expansion, while a reading below 50 signals a contraction. By monitoring these changes, investors, economists, and policy makers can make informed decisions and projections about future economic activities.

Examples

1. Automotive Manufacturing Industry: In January 2021, the ISM Manufacturing Index for the U.S. automotive sector stood at 58.7, indicating expansion in the sector. This could be a result of increased consumer spending, technological advancements, or government stimulus programs. The industry could look at these statistics to make predictions concerning future production levels.2. Pharmaceutical Manufacturing: In August of 2019, it was observed that the ISM Manufacturing Index for the US Pharmaceutical Manufacturing industry was above 50, indicating an expansion in the manufacturing activities. The pharmaceutical companies could have used this data to increase investments, assume more risks or take on larger projects knowing the industry is expanding.3. Electronics Manufacturing Sector: In July of 2018, the ISM Manufacturing Index showed a slight decline to 58.1 from 60.2 in June for the US electronic goods manufacturing industry. This indicated a slowdown but still in the expansion phase of the industry. This kind of data helps businesses to adjust their production schedules, labor needs, and supply chain management strategies, reacting to the projected slowdown in growth.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Purchasing Managers’ Index (PMI): PMI is a measure of the prevailing direction of economic trends in the manufacturing sector. It is based on a monthly survey of supply chain managers across 19 industries and is often used as a barometer for the ISM Manufacturing Index.
• Business Cycle Indicators (BCIs): These are aggregated economic data that are closely watched by analysts and economists in order to predict potential economic activity. The ISM Manufacturing Index is considered a leading indicator, as it often moves ahead of economic cycles.
• Manufacturing Sector: This refers to the sector of the economy that engages in the production and sale of goods. The ISM Manufacturing Index measures the overall health of this sector in the United States.
• Non-Manufacturing ISM Report On Business: This is a report that measures activity in the non-manufacturing sector. This gives analysts insight into different sectors of the economy beyond manufacturing and can be compared and contrasted with the ISM Manufacturing Index.
• Supply Chain Management: This involves the active streamlining of supply-side business activities to maximize customer value and achieve a sustainable competitive advantage. The responses from supply chain managers are used to calculate the ISM Manufacturing Index.

Sources for More Information

• Investopedia
• Institute for Supply Management
• MarketWatch
• Bloomberg