ISM Manufacturing Index: Definition and How It's Calculated

What Is the ISM Manufacturing Index?

The ISM manufacturing index, also known as the purchasing managers' index (PMI), is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. It is considered to be a key indicator of the state of the U.S. economy. Formally called the Manufacturing ISM Report on Business, the survey is conducted by the Institute for Supply Management (ISM).

What Does the ISM Manufacturing Index Measure?

The ISM manufacturing index or PMI measures the change in production levels across the U.S. economy from month to month. The report is released on the first business day of each month. Thus, it is one of the earliest indicators of economic activity that investors and business people get regularly.

The ISM manufacturing index is a composite index that gives equal weighting to new orders, production, employment, supplier deliveries, and inventories. Each factor is seasonally adjusted.

The ISM Report on Business contains three separate purchasing managers indexes based on surveys. In addition to the manufacturing PMI, the ISM produces a services PMI, for the non-manufacturing sector, which is released on the third business day of the month. A hospital's PMI is released on the fifth business day of the month. The Institute also releases a Semi-Annual Economic Forecast in May and December.

Uses of the ISM Manufacturing Index

By monitoring the ISM manufacturing index, investors can better understand national economic trends and conditions. When the index is rising, investors anticipate a bullish stock market in reaction to higher corporate profits. The opposite is the case in the bond markets, which may fall as the ISM Manufacturing Index rises because of the sensitivity of bonds to inflation.

The monthly announcement of the ISM manufacturing index can greatly influence investor and business confidence. This is because the index is a survey of purchasing managers and supply management executives who are at the forefront of their companies' supply chains. Purchasing managers are in the best position to assess the ebb and flow of business conditions. The manufacturers they work for must respond quickly to changes in demand, ramping up or scaling back purchases of materials they use in anticipation of demand for their finished products.

An index of more than 50 indicates an expansion in the manufacturing segment of the economy in comparison with the previous month while a reading of 50 indicates no change and a reading below 50 suggests a contraction of the manufacturing sector.

Index Construction

The ISM 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 industry 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 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. The composite manufacturing index is calculated by taking an equal 20% weighting for five categories of questions on new orders, production, employment, supplier deliveries, and inventories.

The PMI has been calculated and published monthly since 1948 by the ISM, a not-for-profit professional association.

Example of ISM Manufacturing Index

In the beginning of December 2022, the ISM released the series index information for November 2022. The monthly report compared series data from October 2022. Index information from the report is below.

The first three columns from the report indicate the most recent findings from the survey as well as the month-over-month change in each index. The report also signals the rate of change in addition to longer-term trends (how long each index has been moving in any given direction in terms of months).

The example above from December 2022 was the first time since May 2022 that the manufacturing sector had contracted. This can be noted by the '1' for the 'Manufacturing PMI' trend. This index has grown 29 consecutive months prior to this trend reversal.

Last, the ISM does provide commentary on the report. In the example above, the ISM noted that "companies continue to judiciously manage hiring" and "managing head counts and total supply chain inventories remain primary goals". In addition, the ISM includes commentary on several manufacturing industries not explicitly called out in their table of information. For example, six manufacturing industries reported growth in November, led by the apparel industry.

The Bottom Line

The Institute for Supply Management's monthly Manufacturing PMI Report on Business outlines directional trends for several manufacturing indexes. This report details month-over-month changes in growth or contraction in addition to reporting how long each index has been moving in its current direction. The ISM Manufacturing Index is useful in understanding the direction of economic activity from the lens of the country's primary manufacturing companies.