ISM Manufacturing Index

Definition
The Institute for Supply Management, formerly known as the National Association of Purchasing Management, compiles an index of national manufacturing conditions. Readings above 50% for the ISM manufacturing index indicate an expanding factory sector.

Importance
The ISM manufacturing composite index indicates overall factory sector trends. The relevance of this indicator is enhanced by the fact that it is available very early in the month and not subject to revision.

Why do Investors Care?
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM manufacturing index, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The ISM manufacturing data gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. More than one of the ISM sub-indexes provides insight on commodity prices and clues regarding the potential for developing inflation. The Federal Reserve keeps a close watch on this report that helps it to determine the direction of interest rates when inflation signals are flashing in these data. As a result, the markets are highly sensitive to this report.

Interpretation
The bond market will rally (fall) when the ISM manufacturing index is weaker (stronger) than expected. Equity markets prefer lower interest rates and could rally with the bond market. However, a healthy manufacturing sector, indicated by rising ISM index levels, bodes well for corporate earnings and is bullish for the stock market.

The level of the ISM manufacturing composite index suggests the momentum in manufacturing. Historically, readings of 50% or above are associated with an expanding manufacturing sector and a healthy economy. Readings of 42.7% or above represent a contracting manufacturing sector and a stagnant, albeit modestly growing economy. Readings below 42.7% are typically associated with contraction in both the manufacturing sector and overall activity.

Frequency
Monthly.

Source
National Association of Purchasing Management

Availability
Usually the first business day of the month.

Coverage
Data are for the previous month. (Data for June are released in July.)

Revisions
Monthly, none. Annually, new seasonal adjustment factors are introduced. The magnitude of the revision is typically minor.

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