The Guts of ISM
The ISM report has two really critical parts: new orders and PMI. When investors refer to ISM, they mean PMI. The acronym once stood for purchasing manager’s index; it was abbreviated to avoid diluting ISM’s brand.
The new orders data are considered “the guts of ISM.” New orders data show if the economy is slowing, or accelerating, because they show if corporations are ordering more or less than before. Sometimes, new orders will slip below 50 before PMI dips lower. This is why many seasoned investors view new orders as a leading indicator of PMI.
PMI measures five pieces of ISM’s monthly-data: new orders, production, employment, supplier deliveries, and inventories. Each sector accounts for 20 percent of PMI’s total value. When PMI is above 50, it indicates economic expansion. Below 50, it indicates economic contraction.
Some investors criticize ISM data because consumer spending—not manufacturing—drives the U.S. economy. That is an important caveat, but not fatal. PMI data explains about 60 percent of the annual variation in GDP, according to the Institute for Supply Management, with a margin of error of 0.48 percent, up or down. A 60 percent coverage rate might seem weak, but almost all major investment banks produce various economic indicators that function like ISM data. That is how important ISM is on Wall Street. Many investors track global PMI data to gauge economic activity in the United Kingdom, China, and Europe. PMI has become Wall Street’s common measure ...