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ISM Purchasing Managers' Index (PMI)

The ISM Purchasing Managers’ Index (PMI) was formerly known as the National Association of Purchasing Managers (NAPM) index.

The Institute for Supply Management was called the National Association of Purchasing Management until January 2002.

The ISM PMI above 50 indicates an expansion of production activity, while the reading below 50 suggests a contraction. Commonly, when the ISM PMI is around 60, investors start to worry about a possible overheat of the economy, an upturn in inflation, and the implementation of corresponding measures, like a hike in interest rates, by the Federal Reserve. When the index plunges to 40, investors talk about recession. In recent times, investors started paying attention not only to the composite PMI (see Calculation method), but also to the individual components such as employment and operating costs. Thus, the ISM PMI is released right before the publication of the unemployment data and is often used for Bureau of Labor Statistics data refinement.

The Index is calculated on the basis of five components which have the following specific values: New Orders (30%), Production (25%), Employment (20%), Supplier Deliveries (15%), Inventories (10%). Respondents to a survey are asked about the results of production activity. Formal answers are  ‘higher’ (more), ‘lower’ (less) or ‘no changes’ in comparison with the previous month. Respondents may also add his/her own comments. Each component of the report is compiled into  the diffusion index. It is calculated as a sum of simple percentage changes of ‘higher’ and ‘lower’ and a half of the ‘same’ or ‘no changes’ answers. The diffusion index, which is the final indicator, is called the Purchasing Managers Index (PMI). Its value can fluctuate between 0% and 100% with different range spectrum: 50% means no changes, above 50% reflects an improvement, and less that 50% shows a reduction.

Influence on the stock market. If the activity of companies remains mainly profitable and interest rates are kept at relatively low levels, an increase in the diffusion index will likely be seen as a signal for market growth. Otherwise, if other indicators show the approaching end of the business cycle – overheat, inflation, or a hike in interest rates – a rise in the ISM index can give a strong signal to a mass sell-off of shares.

The ISM business activity index is published at 6:00 pm GMT+3 on the first working day of a month following the reporting month.

Source: the Institute for Supply Management

Influence on the market: average

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