Manufacturing experts use a variety of reports and indices to identify industry trends and plan their business strategies. The ISM index is just one piece of data used to plan for the future. This index helps managers determine if they need to hire more employees and order extra raw materials or if they need to be prepared for a shortage of work in the coming months. If you understand the ISM index, you can use the information to plan for periods of growth and contraction in the manufacturing industry.
The ISM manufacturing index, published by the Institute for Supply Chain Management, is used to determine whether the manufacturing industry is growing or shrinking. The ISM index includes a composite index called the PMI, which stands for purchasing managers index. The Institute for Supply Chain Management polls private manufacturing businesses to gather data for the PMI, which is based on new orders, employment, output, stocks of purchases, and supplier delivery times. Each factor is assigned an equal weight in the calculation of the PMI.
A quick glance at the ISM manufacturing index for any month will tell you whether the industry is growing or contracting. An ISM index above 50 percent indicates growth, while an index below 50 percent indicates contraction. Some investment professionals say the ISM index is overrated because of the way it is calculated. The index is a reflection of how many of the people surveyed said things are getting better compared to how many people said things are getting worse. The ISM does not weight responses based on the size of a respondent's firm or on the degree of improvement or decline reported. Despite these concerns, the ISM index is broadly used as an indicator of manufacturing trends.
The PMI used to determine the ISM index should not be confused with the emerging markets PMI produced by HSBC. The PMI determined by HSBC helps investors and economists understand what's going on in emerging markets such as Brazil, Vietnam, China, and Hong Kong. China's manufacturing PMI recently fell to 48.3—the lowest it has been in seven months. Investors will use this information to guide their investment decisions, while manufacturing experts will use the information to make strategic business decisions.
Although the ISM index is an important piece of information, you should use other reports to help you develop a business strategy and make day-to-day manufacturing decisions. The national index is representative of the United States as a whole, but some regions are experiencing a manufacturing boom. If you live in one of these regions, make sure you gather local data to determine whether you should expect industry growth or contraction. The ISM index is a helpful tool, but it's not the only tool available for helping manufacturing experts make decisions.
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