What is the ISM Manufacturing Index?

The ISM Manufacturing Index, also known as the ISM Purchasing Managers’ Index (PMI) is a measure of product demand based on production levels across the US. The index is based on a survey of purchasing and supply executives in over 400 manufacturing companies. It serves as a leading economic indicator for the level of economic activity in the manufacturing sector. It is released at the beginning of every month at 10:00 a.m. (EST).

The ISM Non-Manufacturing Index is similar, though it covers services instead of products. This index is not as closely followed as its counterpart—it’s not as volatile, usually making it more predictable.

What does the ISM PMI indicate?

A reading above 50 indicates expansion in the manufacturing sector, while a reading below 50 indicates contraction.

The PMI is a leading indicator, which means that it can signal future economic activity. It is closely watched by investors, economists, and policymakers as a gauge of the overall health of the economy, and can indicate whether it is expanding or contracting, and whether inflationary pressures are building.

In the past five years, the ISM PMI stayed below 50 briefly due to the pandemic. Following this, an expansion period lasted for 29 months.

How does the PMI relate to the stock market?

The stock market goes hand in hand with the economy. When the PMI is above 50, it indicates the economy (at least, the manufacturing section) is expanding—a growing economy can help create a bull market. When it drops below 50, it indicates that manufacturing business is contracting and may come with a danger of recession. When this is the case, we might be headed toward a bear market.

In the last two months of 2022, the ISM PMI dropped below 50 following a long period of expansion. This data, accompanied by two consecutive GDP declines, led to heated talks of recession in the market. However, as the economic slowdown could well be caused by the interest rate hike, the market was also hoping that Fed could step in and bring back economy growth once again.

The Bottom Line

PMI serves as a leading economic indicator for the level of economic activity in the manufacturing sector. It could also be used to predict the movement of the economy, and thus the stock market, if combined with other economic indicators.