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The ISM manufacturing index is a monthly report issued by the Institute of Supply Management. In general, the report is compiled from data received from purchasers at manufacturing organizations throughout the United States. It tracks changes in the data from month to month in order to help evaluate trends in the manufacturing industry. Many economists look to the ISM manufacturing index as one of the indicators of overall economic health in the U.S.
Typically, the ISM surveys more than 400 manufacturing companies when compiling its manufacturing index each month. In general, it asks questions about nine key areas of purchasing, production and employment, which relate to the economic health of the companies. These topics typically focus on orders that were newly made during the month of the survey, orders that are still pending from previous months, orders that were exported, items that were imported, status of receipt of items from outside suppliers, prices charged for goods, and levels of production, employment and inventory. Rather than looking for hard numbers, the ISM survey generally asks companies to evaluate changes in the areas of focus, such as if there were more or less employees working at the company as compared to the previous month.
Once all surveys are complete, the ISM then typically evaluates the changes in the number of answers that indicate a sector of manufacturing is doing well. Such positive indicators may include, for example, more new orders and an increase in the number of workers. Survey responses that indicate no change in each of the key areas are also counted as positive indicators.
After adjusting for known issues that might affect survey responses, such as variable seasonal demands, a new number for the ISM manufacturing index is issued for the month. This number falls on a scale from zero to 100. In general, most economists believe that an index of less than 50 means the demand for goods is declining, while an index of more than 50 indicates the demand is rising. Experts often then correlate this to the larger economy, inferring that a declining ISM manufacturing index indicates a recession, while an increasing one indicates economic growth.
Because economists look to the index for clues as to how the overall economy is doing, changes in it can have an impact on financial markets, such as the stock market. For example, if the index drops significantly from the previous month, investors may fear an economic recession is on the way and sell off stock in response. Conversely, a higher ISM manufacturing index may spur higher prices in stocks based on the belief that the economy is expanding.