The ISM (Institute of Supply Management) manufacturing index is a U.S. purchasing managers’ index (PMI). The indicator is released monthly and reflects U.S. economic activity based on a survey of purchasing managers at more than 300 manufacturing firms. This indicator is a forward-looking view of economic activity and is considered a vital indicator of the state of the U.S. economy. There are two key ISM indices. The ISM manufacturing index as well as the ISM non-Manufacturing index (or services index). The majority of U.S. economic activity is services related, making this report slightly more critical. While many traders who analyze PMI data reported by other organizations evaluate a composite index, the ISM does not actively report a combined index.
History of the ISM Report
The ISM has published a manufacturing report since 1931. In the early 1980s, the U.S. Department of Commerce and the ISM developed the Purchasing Managers’ Index (PMI). The index combined five components of the ISM’s monthly survey, including:
- new orders
In 1996, the ISM started to report the U.S. Non-Manufacturing ISM. The shift reduced the number of companies reporting information from 100% manufacturing in the 1930s to a 50-50 split between manufacturing and services in the late 1980s. Firms reporting services information include:
- Financial services
- Health services
- Public administration
How is The ISM Data Reported?
The ISM data is reported in two separate releases. Generally, on the first day of the month, the ISM releases its U.S. manufacturing index. Several days later, the ISM will release its services index. The data reflects the survey of participants in a diffusion index that is rated from 1-100. Levels above 50 are considered expansion. Levels below 50 are considered a contraction. The ISM asks participants several questions to determine if a specific sector is expanding or contracting. Additionally, the ISM reports manufacturing indices for several regions around the United States. These purchasing managers indices are used to gauge how the national ISM index will perform. The most prominent of these regional indices is the Chicago PMI index. Since much of the manufacturing takes place in the mid-west, this regional index is carefully watched.
How is the ISM Index Calculated?
The ISM personnel needs to gauge sentiment determining how to reflect survey responses. They do this by looking at the percent change to questions that asked whether the current situation is “Better, Worse or the Same” as the prior period. Using the percent change, they create a difference in their diffusion index, which describes if specific areas that are surveyed are expanding or contracting. The responses are separated by manufacturing clients and services clients, creating the two separate indices.
What is the ISM Breakdown?
The headline report is the most critical component of the ISM manufacturing and non-manufacturing report. Traders will often gauge new-orders to determine if the future situation is accelerating or decelerating. If new-orders are expected to rise, then economic expansion is probable. If new-orders are declining, future economic contraction is likely.
How Does ISM Impact Forex Trading?
The ISM is generally the first essential release reported for the prior month. As mentioned, the ISM Manufacturing index for the preceding month is usually released on the following month’s first trading day. For example, November’s ISM Manufacturing index will generally be released on December’s first trading day. The ISM manufacturing index, as well as the non-Manufacturing index, are used in fundamental analysis. Generally, traders will determine whether the ISM manufacturing number is more significant or worse than expected. Since services make up a broader part of the U.S. economy, the services report’s significance is more critical to overall economic growth. While this is the case in the United States, it does not decrease the ISM Manufacturing Index’s value. If an ISM report is less than or greater than expectations, it can drive interest rates. Forex trading is reliant on the movement of interest rates to guide the direction of an exchange rate. For example, when short-term interest rates move, a currency pair’s forward curves will also change. For example, if you are trading the USD/JPY, and U.S. interest rates rise, but Japanese interest rates remain unchanged, the attractiveness of holding the U.S. dollar will increase. You can practice trading ahead of after the release of the ISM data using a forex demo account provided by Rakuten Securities Australia.
How Can You Track Changes to the ISM Report?
The ISM report can be tracked using an economic calendar. This type of calendar will generally describe when the ISM manufacturing and services reports will be released and what data is expected. You can also use a reputable news portal. The ISM releases its information on its website.
The Bottom Line
The ISM manufacturing and non-manufacturing reports help determine business activity. The ISM report reflects survey data from hundreds of participants that are located in the United States. The data is broken down into several categories, including an overall index, and employment gauge, a new-orders gauge, an inventory gauge, a suppliers gauge, a price gauge, and an import gauge. The ISM indices are diffusion indexes where levels above 50 are considered expansion while readings below 50 are viewed as contraction. The majority of economic activity in the U.S. is service-related, making this index slightly more critical. The ISM report is a critical report for Forex traders. Purchasing manager’s views are generally forward-looking and are considered drivers of interest rate levels. Since interest rates make up the forward curve used in forex trading, changes to these levels can drive an exchange rate’s future direction. Many traders track whether ISM data is stronger or weaker than expected. Levels on the indices above 50 foreshadow expansion and increase interest rates and make a currency more attractive. Levels below 50 tend to weaken interest rates and make a currency less attractive. You can track any changes in the two ISM indices through an economic calendar or a reputable news source.