ISM Manufacturing Survey (PMI)

The ISM Manufacturing Survey, officially referred to as the “Manufacturing ISM ® Report On Business,” is derived from feedback provided by purchasing managers within the manufacturing industry. This report tracks various aspects of manufacturing activity, including production levels, new orders, supplier deliveries, inventory, employment, pricing, imports, and exports. It is the first economic indicator released each month, offering early insights into the economic performance over the preceding four weeks.

What is the ISM Manufacturing Survey? The ISM Manufacturing Survey serves as a monthly gauge of the health of U.S. manufacturing, based on a survey of purchasing managers. Each month, the Institute of Supply Management (ISM) conducts a survey of purchasing managers regarding the current state of their businesses and publishes the findings. The Institute for Supply Management is the oldest and largest supply management association globally. The ISM carefully selects companies that reflect the industry and geographic diversity of U.S. manufacturers for its surveys.

The survey questions require purchasing managers to respond with “better, worse, or the same” or “increase, decrease, or no change.” The ISM compiles the responses into a diffusion index, which ranges from 0 to 100, with 50 as the midpoint. An index above 50 indicates that more respondents reported “better” or “increasing” conditions than those who reported “worse” or “decreasing.” Conversely, an index below 50 suggests that more respondents indicated “worse” or “decreasing” conditions compared to those who reported “better” or “increasing.”

Why is the ISM Manufacturing Survey important? Purchasing managers are responsible for procuring supplies necessary for manufacturing products. They monitor new customer orders and ensure that factories maintain adequate inventory levels to keep production on track. These managers are also well-informed about commodity pricing, supply availability, and delivery timelines for raw materials. When demand for manufactured goods rises, purchasing managers increase orders for production materials and supplies. Conversely, if manufacturing sales decline, these buyers will reduce their industrial orders. Their insights provide a reliable measure of manufacturing activity, which is crucial since manufactured goods account for nearly half of the total economy. The ISM Manufacturing Survey has a proven track record of predicting manufacturers’ profits ahead of other economic reports and is utilized to forecast economic turning points.

How is the ISM Manufacturing Survey calculated? Each month, the ISM distributes questionnaires to approximately 400 member companies across the country, representing 20 different industries. Corporate purchasing managers evaluate whether activity is increasing, decreasing, or remaining unchanged in several areas:

• New orders: Assesses changes in order quantities from the previous month.
• Production: Reports production levels compared to the previous month.
• Employment: Indicates the rate of increase or decrease in overall employment levels compared to the previous month.
• Supplier deliveries: Inquires whether suppliers are delivering materials faster or slower than the previous month.
• Inventories: Measures changes in manufacturers’ inventory levels compared to the previous month.
• Customers’ inventories: Evaluates the inventory levels of manufacturing customers.
• Commodity prices: Reports on rising or falling prices for raw materials.
• Backlog of orders: Indicates whether order backlogs are increasing or decreasing.
• New export orders: Measures the level of orders from outside the U.S. compared to the previous month.
• Imports: Assesses the rate of change for raw material imports compared to the previous month.

The PMI serves as the primary index, providing an overall perspective on the manufacturing sector. Prior to September 1, 2001, “PMI” referred to the Purchasing Managers’ Index. ISM now uses only the acronym, PMI, following a name change. The index is calculated based on the responses to the first five questions listed above, weighted as follows: new orders (30%), production (25%), employment (20%), supplier deliveries (15%), and inventories (10%). The remaining five questions offer additional insights into manufacturing performance.

When is it released? The ISM Manufacturing Survey is published on the first business day of each month at 10:00 am ET.

How do you read it? The results can be interpreted as follows:

• Above 50: Indicates that both manufacturing and the economy are expanding.
• Below 50 but above 43: Suggests that manufacturing activity is contracting, although the overall economy may still be growing.
• Below 43 on a sustained basis: Implies that both manufacturing and the economy are likely in recession, with expectations for the Fed to lower rates to stimulate economic growth.

How does it affect the forex market? A PMI reading above 50 is considered bullish. A trend of increasing PMI values typically signals economic growth, which often leads to higher interest rates, positively impacting the U.S. dollar. Conversely, a PMI reading below 50 is viewed as bearish. A trend of declining PMI values generally indicates a slowing economy, which can lead to lower interest rates, negatively affecting the U.S. dollar.