ISM manufacturing index

Definition

The ISM manufacturing index is a widely recognized economic indicator that measures the health and performance of the manufacturing sector in the United States. 

What is the ISM manufacturing index?

The ISM manufacturing index is based on a monthly survey of purchasing managers at manufacturing firms across various industries. Analysts, policymakers, investors, and businesses use the ISM manufacturing index to assess the current state of the manufacturing sector, predict future economic trends, and make informed decisions about investments, production planning, and risk management.

The ISM manufacturing index is calculated based on a monthly survey conducted by the Institute for Supply Management (ISM). The survey collects data from purchasing managers at more than 300 manufacturing firms representing various industries, where respondents are asked to provide information about their company’s current business conditions and expectations for the near future. A reading above 50 indicates expansion in the manufacturing sector, while a reading below 50 indicates contraction.

The ISM manufacturing index is composed of several sub-indices that reflect different aspects of manufacturing activity:

• New orders index: Measures changes in the volume of new orders received by manufacturers.
• Production index: Tracks changes in manufacturing output levels and production activity.
• Employment index: Indicates changes in manufacturing employment levels and labor market conditions.
• Supplier deliveries index: Measures the speed of deliveries from suppliers to manufacturers, with slower deliveries often indicating increased demand or supply chain disruptions.
• Inventories index: Reflects changes in manufacturers’ inventories of raw materials, work-in-progress, and finished goods.
• Prices index: Tracks changes in input prices, including raw materials, goods, and other production costs.

Changes in the index over time can provide insights into trends in economic growth, inflationary pressures, business confidence, and employment conditions. Analysts also pay attention to the direction and magnitude of changes in individual sub-indices to assess specific areas of strength or weakness within the manufacturing sector.

Example of the ISM manufacturing index

In January, the ISM manufacturing index rose to 55.0, indicating expansion in the manufacturing sector for the sixth consecutive month. However, manufacturers reported challenges related to supply chain disruptions and labor shortages, which led to longer lead times for deliveries. Despite these challenges, the overall outlook remained positive, with optimism about future growth prospects.

In this example, the ISM manufacturing index reading of 55.0 suggests expansion in the manufacturing sector, as it exceeds the threshold of 50.