What is the {term}? ISM Manufacturing Index

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute for Supply Management (ISM). The ISM Manufacturing Index monitors employment, production, inventories, new orders and supplier deliveries. A composite diffusion index monitors conditions in national manufacturing and is based on the data from these surveys.

BREAKING DOWN ISM Manufacturing Index

Why Investors Care

The ISM Manufacturing Index is one of the first investor news announcements released each month and can greatly influence the tone of investor and business confidence. The index is also a survey of purchasing managers who are at the forefront of their companies' supply chains. Manufacturers must respond quickly to changes in demand, and they ramp up or scale back purchases of inputs to match demand. Purchasing managers are in the best position to assess the ebb and flow of business conditions.

By monitoring the ISM Manufacturing Index, investors can better understand national economic conditions. When the index is rising, investors can assume a bullish stock market because of higher corporate profits. The opposite can be thought of the bond markets, which may decrease as the ISM Manufacturing Index increases because of sensitivity to potential inflation.

How the Index is Constructed

The ISM Manufacturing Index is based on data compiled from a nationwide survey of purchasing and supply management executives. The 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 17 NAICS codes including 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 19 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. A composite manufacturing index is calculated by taking an equal 20% weighting for five categories devised from the 10 survey questions: new orders, production, employment, supplier deliveries and inventories. For the sub-indices and composite index, a reading of greater than 50 indicates increased economic activity. A reading of less than 50 indicates a contraction, and a reading of 50 corresponds to no change.