How does the ISM manufacturing index effect the Economy?

Since the Forex market is interlinked with the state of the economy a lot of Forex traders stay abreast of the latest changes in the economy. Moreover to the usually news predictions of the day the majority of Forex traders use fundamental analysis or economic indicators to base their systems on. One economic indicator which is often used by Forex traders is the Institute for Supply Management (ISM) manufacturing index.


The ISM index is not complex


The ISM index is definitely not complicated. This index basically scales manufacturing output during a certain time frame. Although manufacturing is not a big part of the overall economy of developed nations it is an important economic indicator. That is because the ISM index relies on production of the manufacturing parts prior to the goods being sold. In economic words it means that the ISM index is a leading indicator: it changes before the economy changes. If the index drops which means a less manufacturing output it usually indicates a weakening in the economy. On the other hand if the index rises upward which means an increase in manufacturing output it indicates a strengthening of the overall economy.


What does the ISM index scale?


The ISM index scales the manufacturing activity in the country. Here you can see how it is calculated: 300 purchasing managers throughout the country who represent 20 different industries are surveyed on a monthly basis regarding overall manufacturing activity. The index is broken up into 9 sub-indexes of which the five most important are as follows:

  • The Prices Index which gives information relating to another index, the Producer Price Index that is an inflation trend indicator.
  • The Production Index which relates to production numbers.
  • The Employment Index which helps to forecast employment figures for the manufacturing element.
  • The New Orders Index which forecasts factory orders.
  • Supplier Deliveries Index which helps to forecast future health of the economy by using estimates of future deliveries.

What is the meaning of the index numbers?


An ISM index over 50 suggets expansion in the manufacturing sector or growth in an economy. On the other hand an ISM index below 50 suggests a decline in the manufacturing sector or a negative groth in the economy.


How often will be the ISM index released?


The ISM index will be released on a monthly basis: on the first business day of the month for the prior month's numbers.