The ISM Manufacturing Index is a monthly report that tracks changes in data from manufacturing organizations across the US and is considered an indicator of overall economic health. The index falls on a scale of zero to 100, with an index of less than 50 indicating decreasing demand and an index of more than 50 indicating increasing demand. Changes in the index can impact financial markets, such as the stock market.
The ISM Manufacturing Index is a monthly report issued by the Institute for Supply Management. In general, the report is compiled from data received from buyers at manufacturing organizations across the United States. Track changes in data from month to month to help assess trends in the manufacturing industry. Many economists regard the ISM Manufacturing Index as one of the indicators of overall economic health in the US.
The ISM typically surveys more than 400 manufacturing companies when it compiles its manufacturing index each month. In general, it asks questions about nine key areas of purchasing, production and employment, which are related to the economic health of companies. These topics typically focus on orders that were recently placed during the survey month, orders that are still pending from previous months, orders that have been exported, items that have been imported, item receipt status from vendors external sources, prices charged for products, and levels of production, employment, and inventory. Rather than looking for hard numbers, the ISM survey typically asks companies to assess changes in focus areas, such as whether there were more or fewer employees working at the company compared to the previous month.
After all surveys are complete, the ISM typically assesses changes in the number of responses that indicate a manufacturing sector is doing well. Such positive indicators may include, for example, more new orders and an increase in the number of workers. Survey responses indicating no change in each of the key areas are also counted as positive indicators.
After adjusting for known issues that could affect survey responses, such as variable seasonal demands, a new number is issued for the ISM Manufacturing Index for the month. This number falls on a scale of zero to 100. In general, most economists believe that an index of less than 50 means that the demand for goods is decreasing, while an index of more than 50 indicates that the demand is increasing. . Experts often correlate this with the larger economy, inferring that a declining ISM manufacturing index indicates a recession, while a rising one indicates economic growth.
Because economists look to the index for clues about how the overall economy is performing, changes in it can have an impact on financial markets, such as the stock market. For example, if the index falls significantly from the previous month, investors may fear an economic downturn is on the way and sell stocks in response. Conversely, a higher ISM manufacturing index may stimulate higher stock prices based on the belief that the economy is expanding.
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