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ISM Manufacturing Report: An Overview on Reading it

Release Date: First Business Day of Month
Release Time: 10:00am ET
(See the weekly reports)

The Institute for Supply Management is a global organization dedicated to procurement and supply management, and to educating people about these things. It has 45,000 members and describes itself as a “not-for-profit educational association.

For their manufacturing report, more than 300 members of the ISM Business Survey Committee are sent a questionnaire each month concerning various aspects of their businesses that have changed during the current month. The readings for the headline index number, as well as for the sub-indexes are calculated as “diffusion indexes,” whereby the ISM indexes (for, say, employment or new orders) have increased, decreased, or remained unchanged from the previous month. “The ISM indexes are calculated by taking the percentage of respondents that report that the activity has increased ("Better") and adding it to one-half of the percentage that report the activity has not changed ("Same") and adding the two percentages.” (ISM FAQs)

For its headline number as well as for the ten different sub-indexes, the ISM assigns a monthly number that is the result of these “diffusion indexes.” Usually, this number lies between 40 and 65. If the reading is above 50, the manufacturing sector, or one of its subsectors, is expanding. Conversely, if the figure is below 50, then this indicates contraction.

The ISM Manufacturing report is closely watched in the investment community because of its accuracy, rigor, and timeliness. It comes out on the first business day of every month, sometimes just hours after the end of the month which it covers. This data is used to make predictions about the near future of the economy, but also about other reports that come out later that month. For instance, the ISM Manufacturing report’s “prices index” can often predict the Producer Price Index. The “new orders” index can often predict the factory orders report. The “production index” often predicts industrial production. And the “employment index” often predicts manufacturing employment. Other sub-indexes within this report include “supplier deliveries,” “inventories,” “customer inventories,” “prices,” “backlog of orders,” “new export orders,” and “imports.”

Market participants usually see this report in a format something like this, the headline number for June 1, 2015, which contained the May, 2015 data.

 PreviousConsensusConsensus RangeActual
ISM Mfg Index - Level 51.5 51.8 51.0  to 52.7 52.8

The general manufacturing index reading of 52.8 was a little higher than expected but was generally perceived to be a little bit anemic, especially for an economy that is supposed to be in recovery. However, the “new orders” and “backlog of orders” indexes were stronger than most of the rest of the report, thereby auguring new dynamism for the manufacturing sector. 14 of 18 industries reported employment growth, whereas only one subsector, computers and electronics, reported fewer jobs.   

Raoul Pal, famed British publisher of the Global Macro Investor, seems to have hit upon a method of using longer term ISM data to predict and warn about recessions. His research indicates that, historically, when the ISM general index moves down to hit 50, there is an approximately 85% chance that the S & P index will drop an average of 19%, with a 65% chance of recession. Moreover, when the ISM headline index moves down to hit 46, there is an 85% chance of recession. (CNBC, 6/4/15)

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