What it means
The survey asks purchasing and supply executives whether activity in their company is higher, the same or lower than the month before. Because these managers see orders, deliveries and stock levels before they appear in official statistics, the survey is treated as a fast-moving indicator.
Each question produces a diffusion index, meaning a score that measures how widely a change is spread among respondents rather than how big it is. The score is calculated as the percentage reporting an increase plus half the percentage reporting no change.
A score of 50 therefore means the increases and decreases balance out. The headline PMI is the simple average of five of these sub-indices: new orders, production, employment, supplier deliveries and inventories.
Longer delivery times count as a positive because they usually signal strong demand. The report also publishes other indices, such as prices paid, which is watched as a sign of cost pressure.
The report is published early in each month, shortly after the month it covers, which is why it moves markets. A surprise in either direction can shift expectations for interest rates, currencies and share prices, because it hints at what official figures will show later.
For a business, the ISM report is a useful input to planning. A falling new orders index may warn a supplier of slowing demand from manufacturers, and a rising prices paid index may warn a buyer to lock in costs.
It is a survey of sentiment and direction, so it should be read alongside hard data. Seasonal patterns are removed from the published figures so that regular swings, such as holiday shutdowns, do not distort the reading.
Earlier months can also be revised slightly when new seasonal factors are applied, so analysts compare the latest number with the revised series rather than with the number first reported.
In practice
Real-world examples.
Example
A steel distributor sees the headline reading rise above 50 for the first time in months. The sales director raises her forecast for the coming quarter and orders extra stock. She tracks the new orders sub-index specifically because it leads her own sales.
Example
A bank economist reads a fall in the employment sub-index well below 50 while the headline stays near 50. She writes in her client note that factories are cutting back on hiring even though output has held up. Her note is picked up by a regional manufacturing association.
Example
A packaging company's purchasing manager notes that the prices paid index has jumped. He asks his suppliers for fixed-price contracts for the next six months before costs rise further. The finance team adds a sensitivity to the budget for higher material costs.
Formula
Calculation
Sub-index = % reporting higher + (0.5 x % reporting the same)
PMI = (new orders + production + employment + supplier deliveries + inventories) / 5
Suppose that for new orders, 40% of respondents report higher, 40% report the same and 20% report lower. Sub-index = 40 + (0.5 x 40) = 60. Assume the other sub-indices come out at production 54, employment 52, supplier deliveries 50 and inventories 44. PMI = (60 + 54 + 52 + 50 + 44) / 5 = 260 / 5 = 52. Because 52 is above 50, the survey points to expansion.Case study
Seen in the real world.
Northgate Fasteners is an illustrative, fictional maker of industrial screws and bolts. Its managers noticed that the national manufacturing survey had been below 50 for three months in a row, and that the new orders sub-index was falling faster than the headline.
The finance director decided not to rely on a single number. She compared the survey with the company's own order book, which was also softening, and she built a scenario showing the effect of a 10% fall in volumes. She then delayed a planned machine purchase until the next quarter.
When the survey later recovered above 50, the company went ahead with the purchase and had not tied up cash during the slowdown. The illustrative lesson is that a survey is a prompt to check your own data, not a replacement for it.
Watch out
Common mistakes.
- Reading 50 as the level of output, when it is the dividing line between more firms reporting growth and more reporting decline.
- Treating one month's reading as a trend, when the survey is noisy and the direction over several months matters more.
- Assuming the report covers all of the economy, when it covers manufacturing, which is a smaller part of activity than services.
Questions
People also ask.
Why is 50 the dividing line?
Because the diffusion index is built so that equal numbers of firms reporting increases and decreases give a score of 50.
Why do slower deliveries count as a positive?
Slower deliveries usually mean demand is strong and suppliers are stretched, so the index treats them as a sign of expansion.
Who publishes it, and when?
The Institute for Supply Management publishes it early in each month, covering the previous month.
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