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).
Key Takeaways
- The ISM manufacturing index or purchasing managers' index is considered a key indicator of the state of the U.S. economy.
- It indicates the level of demand for products by measuring the amount of ordering activity at the nation's factories.
- The PMI number, which is announced on the first business day of each month, can greatly influence investor and business confidence.
- The Manufacturing Index report outlines index movement for manufacturing, new orders, production, employment, inventory, prices, and backlogs.
- In June 2024, the May 2024 Manufacturing Index reported that the "manufacturing sector contracted in May for the second consecutive month and the 18th time in the last 19 months."
Understanding 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 index that gives equal weight to new orders, production, employment, supplier deliveries, and inventories. Each factor is seasonally adjusted.
The ISM Report on Business contains three separate purchasing managers indexes based on 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.
Uses of the ISM Manufacturing Index
By monitoring the ISM manufacturing index, investors can better understand national economic trends and conditions. When the index is rising, investors anticipate a bullish stock market in reaction to higher corporate profits. The opposite is the case in the bond markets, which may fall as the ISM manufacturing index rises because of the sensitivity of bonds to inflation.
The monthly announcement of the ISM manufacturing index can greatly influence 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 in the best position to assess the ebb and flow of 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 of more than 50 indicates an expansion in the manufacturing segment of the economy in comparison with the previous month while a reading of 50 indicates no change and a reading below 50 suggests a contraction of the manufacturing sector.
Index Construction
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 are asked whether activities in their organizations 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 of the categories, a diffusion index is calculated by adding the percentage of respondents reporting an increase to half of the percentage of respondents 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.
ISM Manufacturing Index Reading
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.
ISM Manufacturing Index, May 2024 | ||||||
---|---|---|---|---|---|---|
Index | Series Index May | Series Index April | Percentage Point Change | Direction | Rate of Change | Trend (Months) |
Manufacturing PMI® | 48.7 | 49.2 | -0.5 | Contracting | Faster | 2 |
New Orders | 45.4 | 49.1 | -3.7 | Contracting | Faster | 2 |
Production | 50.2 | 51.3 | -1.1 | Growing | Slower | 3 |
Employment | 51.1 | 48.6 | +2.5 | Growing | From Contracting | 1 |
Supplier Deliveries | 48.9 | 48.9 | +0.0 | Faster | Same | 3 |
Inventories | 47.9 | 48.2 | -0.3 | Contracting | Faster | 16 |
Customers’ Inventories | 48.3 | 47.8 | +0.5 | Too Low | Slower | 6 |
Prices | 57.0 | 60.9 | -3.9 | Increasing | Slower | 5 |
Backlog of Orders | 42.4 | 45.4 | -3.0 | Contracting | Faster | 20 |
New Export Orders | 50.6 | 48.7 | +1.9 | Growing | From Contracting | 49 |
Imports | 51.1 | 51.9 | -0.8 | Growing | Slower | 5 |
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.
What Is the Current ISM Manufacturing Index?
As of May 2024, the United States ISM Manufacturing PMI is 48.7%.
When Is ISM Data Released?
The ISM Manufacturing Report on Business is released on the first business day of each month at 10:00 a.m. EST. The Services ISM Report on Business is released on the third business day of each month at the same time.
How Do I Read PMI Data?
The ISM manufacturing index provides a number that indicates whether the manufacturing sector is growing or contracting. A PMI reading over 50 (or over 50%) means the sector is growing compared to the previous month, while a PMI reading under 50 (or under 50%) means the sector has contracted month-over-month.
Is ISM a Leading Indicator?
ISM PMI data is considered to be a leading indicator of economic trends. Not only does the ISM manufacturing index report information on the prior two months, but it also outlines long-term trends that have been building over time based on prevailing economic conditions.
The Bottom Line
The Institute for Supply Management's monthly Manufacturing PMI Report on Business outlines directional trends for several manufacturing indexes. This report details month-over-month changes in growth or contraction in addition to reporting how long each index has been moving in its current direction. The ISM manufacturing index is useful in understanding the direction of economic activity from the lens of the country's primary manufacturing companies.