The ISM Manufacturing Report is a commonly-used economic indicator and a gauge of manufacturing activity in the United States. It is a monthly report that surveys executives at industrial companies as a way of developing a snapshot of economic activity in the important manufacturing sector.
Purpose and Usage of the ISM
The ISM Manufacturing Report, officially known as the ISM Index: Manufacturing (or the Manufacturing ISM Report on Business), is designed to reveal important information about the strength of the U.S. economy based on the well-being of the manufacturing sector. While the manufacturing sector is not as dominant as it was during the 20th century, it is still integral to the strength of the U.S. economy. As such, the index is one that is closely followed on a monthly basis by economists, asset traders, and foreign exchange traders.
ISM Manufacturing Report Methodology
The ISM Manufacturing Report is an index built around a survey given out monthly to approximately 300 purchasing executives in the United States by the Institute for Supply Management. The survey involves questions concerning nine sub-indices involving new orders, production, supplier deliveries, inventories, new export orders, imports, backlog of orders, prices, and employment. Together, these sub-indices paint a picture of each company’s health and, collectively, the status of the manufacturing sector’s health in general.
These sub-indices are also used in other component reports, such as the Producer Price Index, manufacturing employment report, and other leading economic indicators.
The index itself is built on a 0 to 100 scale. Any mark above 50 indicates that the economy is expanding. Any mark below 50 indicates that the economy is contracting. Those who follow the ISM interpret the results and attempt to extrapolate their meanings with other major reports, including the non-farm payroll report and the ISM non-manufacturing report. Consecutive positive results suggest that the economy is strengthening, while consecutive negative results suggest the opposite.
Impact of the ISM Manufacturing Report on Forex Trading
The ISM Manufacturing Report is one of the more important economic reports and indicators released on a monthly basis for foreign exchange traders. It almost always moves the market upon its release (on the first business day of each month at 10 a.m. EST), and is a very timely report. As such, most forex traders pay close attention to the ISM Manufacturing Report and its results, particularly if a trend is being established.
The report is important because of the reliance of the American economy on manufacturing. While the United States is a net importer of goods, and even though the domestic manufacturing sector has declined since its apex in the 20th century, manufacturing still helps to drive the economy. As such, the health of the economy as a whole can be gauged in part via the results in the ISM Manufacturing Report. Traders look to the report in conjunction with other reports for trends that may suggest if the economy will be weak or strong, or will expand or contract. This has a direct impact on the value of the U.S. dollar, which is why forex traders pay attention to the report.