One of the best sources of data for top down analysis is from the Institute of Supply Management (ISM). On the first business day of the month, the Manufacturing Report on Business is posted at 10:10 a.m. (EST). On the third business day the Non-Manufacturing Report on Business is posted also at the same time. These two reports are then combined to form the ISM Report on Business (ROB) and provide accurate economic data for the previous month. This is an easy to read report that gets straight to the point without the academic jargon and represents a majority of the national GDP.
These reports compile the data from several hundred purchasing and supply executives in various industries. Members of the ISM Business Survey Committee anonymously respond to monthly questions with one of three responses regarding change by answering, it has not changed, it has increased, or it has decreased. This data is then compiled into the index ranging from 1 to 100 with 50 indicating no change. The further the index is away from 50, the faster the rate of change. This is the nature of the diffusion index by measuring the degree change is dispersed.
The most sought after number in the report by economists is the Purchasing Managers’ Index (PMI). At this time it is available only for the Manufacturing ROB, however it accounts for nearly 60% of GDP activity. The PMI is a composite index based on the seasonally adjusted diffusion indexes from the following with their respective weighting: New Orders – 30%, Production – 25%, Employment – 20%, Supplier Deliveries – 15%, and Inventories – 10%.
In general, a PMI over 50% indicates growth and less than 50% indicates contraction in the manufacturing economy. Furthermore, 42% is considered the overall economic breakeven.
In the first section of the Report on Business, it covers the rate of change of growth and activity in the economy and the underlying drivers. It also addresses the top performing sectors for the previous month.
The report continues with charts and graphs of nearly a dozen index summaries. Manufacturing indexes covered are: PMI, New Orders, Production, Employment, Supplier Deliveries, Inventories, Customers’ Inventories, Prices, Backlog of Orders, Exports and Imports.
Non-manufacturing indexes differs only from the previous index by not having Customers’ Inventories data, but having Inventory Sentiment numbers. In addition it covers significant changes in commodity prices and commodities in short supply.
The index summary data breakdown down is simple and is in typically two sections and a chart. The first section addresses the rate of change in the index and the second addresses the leading and lagging industries in the index.
The ISM Report on Business is one of the best near term sources of data with little lag time. It is clear and provides essential metrics and sub metrics to what is driving the markets. For the active investor needing to quickly identify economic trends in the marketplace, the monthly ISM Report on Business is a must read.
