Institute for Supply Management (ISM) Manufacturing Survey

Published by: Institute for Supply Management

Frequency: Monthly

Period Covered: Prior Month

Market Significance: Very High

Web Site: http://www.ism.ws

Presented by: Jesse Garate

Victor M Lorenzo

What is it?

• Manufacturing survey• Tempe-Arizona-based group that represents corporate purchasing

managers around the country• Two major surveys: Comments from Manufacturing and Non-

Manufacturing sectors• Purchasing managers are asked to assess if activity is rising,

falling or unchanged: • Questionnaires are sent out every month to about 400 companies,

representing 20 different industries• Survey results come out on the first business day of every month

What is in the report?The report is broken down in the following fields:

New Orders- New orders by purchasing agents

Production- Manufacturing output

Employment- Hiring in the company

Supplier deliveries- Speed of the delivery from suppliers

Inventories- The rate of liquidating manufacturers’ inventories

Customer’s inventories- Agents guess the inventory levels of their customers

Commodity prices- Prices paid by the manufacturing for suppliers

Backlog of order- Orders not yet filled

New Export orders- Rate of new orders from other countries

Imports- Material that agents purchased from other countries

What is in the report?The PMI is a composite index based on the seasonally adjusted diffusion indices for five of the indicators with varying weights:

New Orders 30%

Production 25%

Employment 20%

Supplier Deliveries 15%

Inventories 10%

PMI is calculated as a diffusion index, which shows changes in activity from month to month showing the prevailing direction of change and the scope of change, but does not show actual levels of production

How is it computed?

ISM takes the of those who reported higher activity and adds 50 of those who reported no changes

Example: 50 % reported no change and 29.7% reported higher activity.

1)We take 50% of those who reported no change:

.50 x .50= 25%

2) We add 25% to those who reported higher activity:

25% + 29.7%= 54.7%

Why is it important?

•Considered as the most reliable short-term economic barometer

•Overall PMI gauges turning points in the business cycles and closely linked to movement in the GDP

•ISM Index is a leading indicator of economic activity

•Since it covers 20 different industries, it gives clues as to the greatest sources of strength and weaknesses in the economy

–Which sectors are growing?

–Which are hiring?

–Which are feeling the inflation pinch?

•Timeliness: Results are in first business day of every month

Keys to interpreting the data

The PMI benchmark that is used to measure economic activity is 50

– Index > 60 (sustained basis 3 to 6 months): Both manufacturing and the economy showing vigorous growth and low unemployment could prompt the FED to increase rates.

– Index > 50 but < 60: Both manufacturing and the economy are expanding

– Index = 50: No change In activity. It is believed to be consistent with real GDP growth of about 2.5%.

– Index < 50 but > 43: Manufacturing activity is contracting, yet the overall economy may still be growing

– Index < 43 (sustained basis 3 to 6 months): Mfg and economy likely to be in recession. Could prompt the FED to lower rates.

Historical Data 1999-2002

PMI

010203040506070

JAN

FEB

MAR AP

RM

AY JUN

JUL

AUG

SEP

OCT

NOV

DEC

JAN

FEB

MAR AP

RM

AY JUN

JUL

AUG

SEP

OCT

NOV

DEC

JAN

FEB

MAR AP

RM

AY JUN

JUL

AUG

SEP

OCT

NOV

DEC

JAN

FEB

MAR AP

RM

AY JUN

JUL

AUG

SEP

OCT

NOV

DEC

1999 2000 2001 2002

TIME

INDE

X

Historical Data 2003-2007

PMI

010203040506070

JAN

FEB

MA

RA

PR

MA

YJU

NJU

LA

UG

SE

PO

CT

NO

VD

EC

JAN

FEB

MA

RA

PR

MA

YJU

NJU

LA

UG

SE

PO

CT

NO

VD

EC

JAN

FEB

MA

RA

PR

MA

YJU

NJU

LA

UG

SE

PO

CT

NO

VD

EC

JAN

FEB

MA

RA

PR

MA

YJU

NJU

LA

UG

SE

PO

CT

NO

VD

EC

JAN

FEB

MA

RA

PR

2003 2004 2005 2006 2007

TIME

IND

EX

PMI Annual Trend

0

10

20

30

40

50

60

70

1999 2000 2001 2002 2003 2004 2005 2006

Ind

ex

PMI

PMI 54.633333 51.658333 43.908333 52.366667 53.266667 60.491667 55.475 53.875

1 2 3 4 5 6 7 8

GDP Annual Trend

0

1

2

3

4

5

1999 2000 2001 2002 2003 2004 2005 2006

Pe

rce

nta

ge

GDP

GDP 4.5 3.7 0.8 1.6 2.5 3.9 3.2 3.3

1 2 3 4 5 6 7 8

PMI vs. GDP

Latest Release

MANUFACTURING AT A GLANCE APRIL 2007

(Released May 1, 2007)

Index

Series Index April

Series Index March

% Point

Change

Direction

Rate of Change

Trend*

(Months)

PMI 54.7 50.9 +3.8 Growing Faster 3

New Orders 58.5 51.6 +6.9 Growing Faster 5

Production 57.3 53.0 +4.3 Growing Faster 3

Employment 53.1 48.7 +4.4 Growing From Contracting 1

Supplier Deliveries

50.2 51.3 -1.1 Slowing Slower 46

Inventories 46.3 47.5 -1.2 Contracting Faster 9

Customers’ Inventories

47.0 48.0 -1.0 Too Low Faster 2

Prices 73.0 65.5 +7.5 Increasing Faster 4

Backlog of Orders

54.5 47.0 +7.5 Growing From Contracting 1

Exports 57.0 55.5 +1.5 Growing Faster 53

Imports 58.0 57.5 +0.5 Growing Faster 64

Growing Faster 66 OVERALL ECONOMY

Manufacturing Sector Growing Faster 3

Data Analysis

Based on the information from this indicator, we conclude:

-The economy is expanding slightly faster

-We foresee the FED to either stay at current interest rate of 5.25 or slightly increase it