DEFINITION of 'The National Association Of Purchasing Managers (NAPM) Index'
A monthly index of U.S. manufacturing compiled by the Institute of Supply Management (ISM). Previously known as the National Association of Purchasing Management (NAPM) Index, the ISM Manufacturing Index is derived from the institute’s “Report on Business” survey of purchasing and supply executives across the nation. It is considered one of the most reliable leading indicators available to assess the near-term direction of the U.S. economy. Also known as the PMI Composite Index, an index reading above 50% indicates that the manufacturing sector is generally expanding, while a reading below 50% indicates contraction. The further the index is away from 50%, the greater the rate of change. The report for a specific month is released on the first business day of the following month. It has been issued without interruption since 1931, except for a four-year hiatus during World War II.
BREAKING DOWN 'The National Association Of Purchasing Managers (NAPM) Index'
The NAPM Index – which is now known as the ISM Index – is derived from the “Report on Business” survey that encompasses 18 diverse sectors of the U.S. manufacturing economy. It is sent out to survey respondents in the first part of each month, with respondents asked to report changes in 10 specific business activities as compared to the previous month. These activities are new orders, production, employment, supplier deliveries, inventories, customers’ inventories, prices, backlog of orders, exports and imports.
For each business activity, survey respondents indicate whether it has increased, decreased or remained unchanged from the previous month. The data for each activity is used to compile a diffusion index, which is calculated by adding the percentage of respondents who report that the activity has increased with one-half of the percentage who report unchanged activity. For example, if 30% of respondents in a particular month report that production has increased, 45% report no change, and 25% report a decrease, the diffusion index for production would be 52.5%.
The headline PMI Composite Index number is based on an equal weight (20%) of the following five indicators – new orders, production, employment, supplier deliveries (all of which are seasonally adjusted) and inventories. Apart from indicating that the manufacturing sector is expanding, the PMI Index also shows expansion or contraction of the overall U.S. economy. A reading above 42.2% over a period of time indicates GDP expansion, while a reading below 42.2% shows GDP contraction.
Note that the ISM was known as the NAPM until January 2, 2002, when it underwent a name change to position itself in the broader context of supply management and not merely the purchasing function. Similarly, while the “PMI” stood for Purchasing Managers’ Index prior to September 1, 2001, ISM only uses the acronym to reflect ISM’s name change and wider scope.