Link to the ISM Manufacturing Report:
Text From Video:
The ISM Manufacturing report is issued monthly by the institute of supply management on the first business day after the month being reported, making it the first monthly report on the economy.
Each month, the ISM sends out a survey to about 400 companies in about 20 different manufacturing sectors, inquiring on the activity for the month.
The survey asks managers to assess the levels of new orders, production levels, inventory levels, supplier deliveries, employment, commodity prices, customer inventories, and more. For each question, the managers are asked to select one of three choices: Better, Same, or Worse.
The responses to the survey are used to generate the ISM Manufacturing report.
Let’s look at the report-
The first part contains the Purchasing Manager’s Index number, and then the index number for each of the sub-categories used to calculate the total PMI.
Listed is the current index number for each category, the previous month’s index number, and the percent of change for one month.
Then there is the direction that category is going, the rate of change for that direction, and the number of months it has been moving in that direction.
On the bottom is a assessment of the entire manufacturing sector and the overall economy.
There is also a section for commodity prices, and for responders comments.
In the following sections, the report expands the sub-categories from the first section to include much more detail, including identifying which sectors reported better or worse results for the category.
For each section in the report, an index number between 0 and 100 is generated.
It is calculated by taking the percentage of those reporting an increase in activity and adding to it half of the percentage of those reporting no increase in activity.
If the response is worse, it is not counted.
For example, if 40% of the responders report an increase in activity, 40% reported no change, and 20% reported worse, the PMI will be 40, plus half of the 40% that reported no increase for a PMI of 60.
A score of 100 means all responses reported better.
A score of 0 means all responses reported worse.
A score of 50 means that there was an equal number of better and worse responses.
The most important component of the entire report is the Purchasing Manager’s Index, or PMI.
The PMI is a weighted index number generated from the answers to the first 5 sections of the survey- the levels of new orders, production levels, inventory levels, supplier deliveries, and employment. (Show the percents in vid as the background)
A PMI above 50 means the both manufacturing as well as the entire economy is growing.
Less than the low 40s means that both manufacturing and the entire economy is contracting.
Below 50, but above low 40s means that manufacturing is contracting, but the overall economy might still be growing.
Equally as important as the index number is the rate of change from the previous month. For instance, if the current index number is 52, yet the previous 2 months before that the numbers were in the 60s, then the 52 reading would be considered bad news.
Remember that this report is used to help a trader try and predict where the economy is going. By looking at the rate of change for each month, one can get an idea of which way the numbers are heading.
In general, an increasing PMI number is seen as a good sign for the economy, because it shows that demand is increasing.
However, it depends on where the economy lies on the business cycle.
If GDP is declining or near the low end of the cycle, an increase in demand shows that the economy is improving,
However, if GDP is already near the high end of the cycle, an increase in demand could be a signal that inflation is increasing and efforts may be taken to slow down the economy such as raising interest rates.
In other words, if the economy is already booming, a report that says it is growing bigger could be considered bad news.
—————————
Another important section to monitor is the New Orders section.
It can be used to gauge if the economy is expanding or contracting, and is an excellent indicator for predicting short term changes in GDP.
The new orders section can be used for, among other things, gauging future employment levels.
If the level of new orders is rising, companies will need to hire more employees to build the goods.
If the level is dropping, employers may find they need to reduce the number of employees they have.
The Employment Index tracks current employment
So you have the Employment Index, which indicates the current employment situation, and the New Orders Index, which shows a slightly longer view of the employment situation.
—————
The Price Index tracks the prices manufacturers pay for materials.
If the index number is increasing, it means that material costs are increasing, making this an excellent leading inflation indicator.
The Supplier Deliveries Index should also be closely monitored.
The Supplier Deliveries Index tracks the delivery times from manufacturer’s suppliers.
If the index number is increasing, it means that manufacturers are waiting longer to receive materials.
This shows that demand for supplies is increasing, and could indicate that inflation is on the horizon.
In addition, there is a special section for commodities. This section specifically names which commodities are up or down in price, and which are in short supply.
In addition to being an excellent short term indicator for the prices of the specific commodities named, this section is also a leading indicator of longer term inflation.
So you have the Price Index to reflect where inflation is now, the Suppler Delivery section to show where inflation is heading, and the commodities section for a glimpse into even longer term inflation.
————————-
2 more sections worth mentioning are in Inventories and Customer Inventories indexes.
When the index numbers in these sections are increasing, it means that inventory levels are increasing.
Increasing inventory levels could be a sign that demand is dropping. Because of this, it could also be an indicator that unemployment may rise soon.
When inventory levels decrease, it means demand is increasing. This means that GDP is growing and unemployment levels should begin to decline. However, it may also mean that inflation will soon increase.
http://www.ism.ws/
_________________________
So there you have it- ISM Manufacturing Report , one of the bigger economic releases.
I have only touched on the many uses for this report.
It is excellent tool to help gauge growth, inflation, unemployment., and much more for individual sectors. as well as the entire economy.
It is also the first monthly economic reported released.
In our next vid, we’ll look at a more specific section of manufacturing- durable goods.
Danse Macabre – Low Strings Finale (Theme)
Diving Turtle
