Understanding ISM PMI data

What it means, how it works and why it matters

This week we’ll get both ISM Manufacturing and Services PMI data. These data sets are important, and often misunderstood. My hope in writing this article is to shed light on the value of this data, but first let’s talk about what it is and how it is calculated.

ISM (Institute for Supply Management) is a leading provider of business data that helps investors and traders gauge the health of various sectors within an economy. The organization surveys purchasing managers across multiple industries to gather insights on current economic trends, including employment, inflation, stock market earnings, and more.

What are ISM Services PMI (Purchasing Managers' Index) Data Sets?

ISM's services sector encompasses a broad range of non-manufacturing sectors such as finance, healthcare, technology, education, and entertainment. The Services PMI data set is based on surveys sent to over 400 purchasing managers from various industries within the United States.

A sample from the ISM Services PMI report

What are ISM Manufacturing PMI (Purchasing Managers' Index) Data Sets?

ISM's manufacturing sector encompasses a range of sectors that produce goods such as aerospace, automotive, chemicals, electronics, and pharmaceuticals and is sent out to purchasing managers around the United States in manufacturing.

A sample from the ISM Manufacturing PMI report

How are ISM Services and Manufacturing PMI Data Sets Calculated?

ISM calculates its PMI indices using a diffusion index calculation method. This involves analyzing responses to survey questions that gauge current economic conditions, production levels, new orders, employment rates, supplier deliveries, inventories, prices paid for raw materials, and more.

A sample from the ISM Services PMI report

The data is then weighted based on the relative importance of each sector within the overall economy. A PMI reading above 50 indicates expansion (growth), while a reading below 50 signals contraction (loss).

What do ISM Services and Manufacturing PMI Data Sets Mean?

ISM's services and manufacturing PMIs provide valuable insights into various aspects of an economy, including:

  1. Economic Growth: At the top-level, a rising index suggests that the sector is growing or expanding. The opposite is true of a falling index. The chart below indicates the positive correlation we can see between ISM Manufacturing PMI and US GDP, as one example.

    Manufacturing (blue) vs GDP (orange)

  2. Employment Growth: Within the index, the employment measure within the index can give us a sign as to which industries are hiring, how robust growth is, and the implications that may have on labor market data.

  3. New Orders and Backlogs: Order activity is another measure within the index that can tell us how much business there is in the present, and how much is left to do via new orders and backlogs respectively. This can give us a sense as to how robust demand is and that can give us a sense as to how healthy growth is within services, manufacturing and individual industries within the surveys.

Why are ISM Services and Manufacturing PMI Data Sets Important?

These data sets offer several benefits to investors:

  1. Early Warning System: The high-frequency nature of these surveys provides early warnings on potential economic shifts or downturns.

  2. Sector-Specific Insights: By analyzing individual sectors within the services and manufacturing industries, you can gain valuable insights into specific areas that may be driving growth or contraction.

How do ISM Services and Manufacturing PMI Data Sets Influence Stock Market Earnings?

ISM's data sets have a significant impact on stock market earnings forecasting:

  1. Growth Trends: A rising index in the services or manufacturing sector can be a sign of increased consumer spending and economic activity, which may portend to increased earnings and revenue growth from the industries benefiting.

  2. Inflationary Pressures: Higher prices paid by purchasing managers can lead to higher production costs and potentially lower profit margins if company’s lack pricing power. Otherwise it can be a booster for both revenue and profit margins, as we saw in part of 2023.

ISM Prices Index (blue) vs CPI (red)

Closing Thoughts

ISM's Services PMI and Manufacturing PMI data sets provide valuable insights into various aspects of an economy at a high frequency near-time, often leading other metrics in detecting changes within the market. Understanding these indices can help investors make more informed decisions.

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