Statistics: What the ISM Manufacturing and Non-Manufacturing Index Signals
Updated 2/13/20, Posted 12/6/13
By Jean Regan, President & CEO
In this seven part series, I’m focusing on different commonly referenced indicators and explaining their impact. These indicators are (1) the unemployment rate, (2) the inflation rate, (3) housing sales and starts, (4) the Federal Reserve’s Monetary Policy, (5) retail sales, (6) ISM manufacturing and non-manufacturing index, and (7) GDP growth.
Each year, and I’m sure this year will be no exception, the amount of information available to us increases - making it difficult to decide what’s worth reviewing. While most of the other indicators I’ve referenced in this series have a corresponding government report, I’ve found two reports that are produced by an independent institute to be particularly helpful. These reports are the Manufacturing ISM Report On Business® and Non-Manufacturing ISM Report On Business® which provide indexes geared to clarify whether there’s contraction or growth in different industries.
What is the ISM manufacturing and non-manufacturing index?
The Institute for Supply Management (ISM) was founded in 1915 as the first of their kind and they offer reports, certifications, conferences and many other resources. What they’re most widely known for is their monthly ISM Manufacturing Report On Business® which has been produced since 1931, and comes out on the first business day of each month.
PMI originally stood for Purchasing Manager’s Index, but the index has expanded its purpose to provide information beyond only the purchasing function. Basically, how their index works is that a reading over 50 represents expansion and below 50 represents contraction.
This index system was originally developed back in 1982 by both the U.S. Department of Commerce (DOC) and ISM working together. The data used in the report comes from the institute's Business Survey Committee, comprised of over 300 purchasing and supply executives from across the country that respond to the survey each month.
The purpose for the index is that it adjusts the five components of the monthly survey for seasonal variations, weighs each one equally, and then calculates them into a single monthly index number. The five components it averages are: (1) New Orders, (2) Production, (3) Employment, (4) Supplier Deliveries and (5) Inventories.
Much later in 1998, the ISM started producing a new report-- ISM Non-Manufacturing Report On Business®. This is similarly based on data compiled from monthly surveys from over 375 purchasing executives across the country and features a composite index. For this report, the index was created as recently as 2008 and is called the NMI. This index is based on four rather than five equally weighted indicators: (1) Business Activity, (2) New Orders, (3) Employment and (4) Supplier Deliveries.
This index is also used in many other countries outside the US like China, Japan and France making it a useful baseline of comparison.
What does the ISM manufacturing and non-manufacturing index mean for the economy?
The ISM index provides the timeliest indication each month about the health of the manufacturing and non-manufacturing sectors. Manufacturing alone accounts for about 12 percent of the economy, so this is an important area to watch.
As well as telling you whether there’s growth or contraction in different industries, it tells you whether they’re changing faster, slower, or the same. For example, if the manufacturing PMI registered at 56.4 in March and then at 57.3 percent in April, this would indicate not only that the manufacturing sector is growing, since the figure is over 50, but that it’s growing faster since it’s increased 0.9 percent over the last month.
For those who are mainly concerned about a particular industry, in these reports under each indicator you’ll find a listing of which industries are growing, contracting or staying the same.
What does the ISM non-manufacturing and manufacturing index mean for the logistics industry?
The information provided in the ISM indexes help with forecasting demand for goods and services and provides a better idea of how much shipping volume will exist. It also provides a benchmark that can be used to measure yourself against the industry to see how you’re doing overall or in different areas. I would recommend using these reports as a resource along with other economic indicators to get a better idea of what to expect ahead.
How have you seen the ISM manufacturing and non-manufacturing index influence the logistics industry? Are there any tools you use to keep an eye on the ISM manufacturing and non-manufacturing index? Comment below to share.