January ISM Index

Updated 01-Feb-07 10:34 ET


  • January ISM national manufacturing survey 49.3 (-2.1 pts).

Key Factors

  • A sub 50 level reflects contraction in manufacturing activity.
  • The sub 50 level in November was revised to an improved 49.9.  Two declines in three months heightens the caution.
  • New orders held above 50 (50.3) after a slip to 49.7 in November.
  • Production fell back below 50 (49.6) after a lower level in November.
  • The drags are inventories (39.9), order backlogs (43.5) and employment with the last three months below 50.
  • Prices paid remained tame at 53 after 2 of the prior 3 months below 48. 
  • Actual factory orders and industrial production showed stronger growth at year end.  Large inventories need to be worked down.
  • 2007 production expected to rebound with business confidence and capital investment

Big Picture

  • Stalled demand given slowed business investment and the resulting effects from the struggling auto and housing sectors left the ISM index below a neutral 50 in November and to a lower level in January.  Business investment has some supportive fundamentals -- cash loaded balance sheets and a high capacity utilization rates urging continued labor saving investment -- but weakened business confidence in Q3 stalled order growth.  Business confidence rose in Q4 with further gains expected in 2007 given the strengthening economy.  We expect manufacturing activity to grow with the lift in confidence and the resulting return of capital investment as sectoral difficulties in autos and housing lighten.

Category Jan Dec Nov Oct Sep
Total Index 49.3 51.4 49.9 51.5 52.7
  Orders 50.3 51.9 49.7 52.1 54.2
  Production 49.6 52.4 49.3 52.7 54.9
  Employment 49.5 49.4 48.9 50.6 49.6
  Deliveries 52.7 53.3 52.8 50.6 54.1
  Inventories 39.9 48.5 49.1 49.3 47.1
  Export Orders 52.5 54.3 56.9 57.8 55.3
  Prices paid (not seas adj) 53.0 47.5 53.5 47.0 61.0

Release Details

ISM: Institute for Supply Management

formerly NAPM: National Association of Purchasing Managers

In Brief

The ISM report is a national survey of purchasing managers which covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders. Diffusion indexes are produced for each of these categories, with a reading over 50% indicating expansion relative to the prior month, and a sub-50% reading indicating contraction.

The total index is calculated based on a weighted average of the following five sub-indexes, with weights in parentheses: new orders (30%), production (25%), employment (20%), deliveries (15%), and inventories (10%).

The ISM is one of the first comprehensive economic releases of the month, typically preceding the employment report. Though it covers only the manufacturing sector, it can often provide accurate hints regarding the tone of subsequent releases. During periods of inflation concerns, the prices paid and vendor deliveries indexes often determine the bond market's reaction to the report.

In Depth

The Institute for Supply Management's monthly Report on Business is probably the most widely watched economic indicator produced by the private sector. There are two key reasons for the ISM's prominence. First, its longevity - the report was first produced in 1931, and after a break during World War II, it has produced continuously since 1948. Second , its leading quality - the ISM has been one of the better predictors of the business cycle over the years.

Who and What It Surveys

The ISM index is the result of a monthly survey of over 400 companies in 20 industries throughout the 50 states. The survey queries respondents on a number of monthly indicators, including orders, production, employment, inventories, delivery times, prices paid, export orders, and import orders. Respondents are asked to characterize each indicator as higher, lower, or unchanged for the month (or faster/slower in the case of delivery times). They are not asked for specific numbers - only a thumbs up or down.

Presenting the Numbers

Based on these responses, the ISM calculates diffusion indexes for each of the components. These diffusion indexes are calculated by adding half of the percentage of respondents answering "unchanged" to the percentage answering "higher" (or "slower" for deliveries). These diffusion indexes do not yield estimates of specific magnitudes of strength or weakness, but the more respondents who are indicating trends in the same direction - the better the chance that the magnitude of that move is larger.

A diffusion index of 50% is the theoretical breakeven mark - with readings above indicating strength and below indicating weakness. The ISM only provides the raw data - the Department of Commerce produces the seasonal factors which are used to provide more meaningful, seasonally adjusted indexes.

The total index is not the result of a separate question regarding general business conditions (as is the case with the Philadelphia Fed index). Instead, the index is calculated using the weighted sum of five of the subindexes. Orders account for 30% of the total; production - 25%; employment - 20%; deliveries - 15%; inventories - 10%. Prices, export orders, and import orders are not part of the total index.

Breakevens in Theory and Practice

Though 50% is the breakeven mark in theory, different readings have proved to be breakeven in practice. For new orders, 50.3% is the level consistent with breakeven readings in factory orders. For production, 49.4% has been the breakeven mark in theory and practice. For employment, 47.5% has been consistent with a steady level of manufacturing employment. For inventories, 41.3% has been consistent with steady business inventory readings. And finally, the 42.7% mark on the total index marks the point below which the overall economy is believed to be in recession. Between 42.7-50%, the manufacturing sector may be in decline, but the total economy is only seeing slower growth.

No Services

This observation highlights the important element which is missing from the ISM index - the service sector. With the manufacturing sector making up an ever-shrinking percentage of the total economy - the ISM might seem to be an indicator in decline. Not so, however - the manufacturing sector, while shrinking in relative terms, still tends to lead the total economy into and out of recessions. The ISM therefore remains a closely watched indicator despite its manufacturing focus.

A Proven Performer

The ISM's leading quality has been proven over time. Its bottom during a recession has preceded the turning point for the business cycle by an average of four months, and its worst performance in leading the turning point was on two occasions when the ISM trough occurred in the same month as the business cycle trough. The ISM index is released on the first business day of each at 10:00 ET, with data for the prior calendar month.