The ISM Manufacturing Index and the Economy

Since the Forex market is interwoven with the state of the economy, most Forex traders stay abreast of the latest changes in the economy. In addition to the usually news forecasts of the day, the majority of Forex traders utilize fundamental analysis or economic indicators to base their strategies on. One economic indicator that's often used by Forex traders is the Institute for Supply Management (ISM) manufacturing index.

It only sounds complicated

The ISM index is really not complicated. This index basically measures manufacturing output during a certain time frame. Even though manufacturing is not a huge chunk of the overall economy of developed nations, it still reigns high as an economic indicator. That's because the ISM index relies on production of the manufacturing parts prior to the goods being sold. In economic talk, that means that the ISM index is a leading indicator: it changes before the economy changes. If the index drops (less manufacturing output), that usually indicates a weakening in the economy. On the other hand, if the index edges upward (an increase in manufacturing output), that more than likely indicates a strengthening of the overall economy.

What does ISM index measure?

The ISM index measures the manufacturing activity in the country. Here's how it's calculated: 300 purchasing managers throughout the country, representing 20 different industries, are surveyed on a monthly basis regarding overall manufacturing activity. The index is broken up into 9 sub-indexes, of which the five most important are as follows:

  • The Prices Index - gives information relating to another index, the Producer Price Index, which is an inflation trend indicator.
  • The Production Index - relates to production numbers.
  • The Employment Index - helps to predict employment figures for the manufacturing element.
  • The New Orders Index - predicts factory orders.
  • Supplier Deliveries Index - helps predict future health of the economy by utilizing estimates of future deliveries.

What do the index numbers mean?

An ISM index reading over 50 indicates expansion in the manufacturing sector, or growth in an economy. On the other hand, an ISM index reading below 50 indicates reduction in the manufacturing sector, or a contraction in the economy.

How often is the ISM index released?

The ISM index is released on a monthly basis, on the first business day of the month for the prior month's numbers.

by Harman Gilly