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Every month, the ISM compiles the Purchasing Managers’ Indexes based on surveys of supply chain professionals. The highly anticipated data not only influences decisions in sourcing and procurement departments, it can even move stock markets. But, it pays to look beyond the broader ISM indexes to some of the underlying survey readings. These numbers, when interpreted correctly, can help you to draw conclusions about market trends and the future state of the economy.
Today, let’s take a closer look at the data published by ISM, reaching beyond the manufacturing (PMI) and non-manufacturing (NMI) indexes that are cited most often. Indeed, if you read the monthly reports and dig deeper into the data, you will find that the ISM reports not only provide additional data to validate current market trends - they give you a view into what might be on the horizon for the broader global economy. One of the key components of both the NMI and the PMI is the New Orders Index:
In this case, a reading above 50 indicates that new orders are picking up, or that bookings are trending favorably. A reading below 50 means that survey responders are pessimistic about new orders, or that the trend is negative in bookings. Using historic data in the manufacturing sector, a reading above 48.6 in the ISM index generally corresponds to an increase in manufacturing orders tracked by the US Census Bureau.
As one can see from the graph above, new orders for both goods and services began a steady decline last September. However, the manufacturing sector bottomed out in December at an all-time record low of 23.1, and the index has since improved to pass the expansion benchmark of 48.6. Likewise, the services (or non-manufacturing) sector reached its low point in November and has since improved to a reading of 48.6 in June. Although neither number is above 50, the trend is certainly positive, and the New Orders data provides a strong indication that the bookings climate for new business is improving rapidly in both the manufacturing and services sectors of the economy.
Next up, we’ll take a look at Employment data for what you can glean about the manufacturing sector.
Pat Furey is a Senior Category Manager in Ariba’s Global Sourcing Organization. Pat leads the team of global category managers covering direct materials and indirect goods and services.
4 responses so far ↓
1 Charles Dominick, SPSM // Jul 30, 2009 at 3:05 pm
The tricky part with how ISM indexes things is that a number that goes up from the previous month can mean that the situation is still declining as counterintuitive as that sounds.
Yes, by looking at the chart it “appears” that new orders had “bottomed out” in November and December. But, to me, bottoming out means that declines have stopped and growth is about to resume. Until the index has a value of 50, growth has not resumed.
The trend - going from a lowest index value towards 50 - indicates that contraction is slowing and that, if the trend continues, that 50 mark will be reached and surpassed. Once surpassed, one could look back and say that the month in which 50 was reached was where the real “bottoming out” - or end of contraction - occurred.
So, in my words, I would not say that “the New Orders data provides a strong indication that the bookings climate for new business is improving rapidly.” I would say “the New Orders data provides a strong indication that the bookings climate for new business is poised to cease contracting barring no unusual events.”
I have tried to correct these misunderstandings about the ISM index on this blog in comments and interviews as well as on my blog. One of the key things to understand is that the number represents a change from the previous month. So if January had a reading of 30, February a reading of 35, and March a reading of 40, that means that January was worse than December, February was worse than January, and March was worse than February as crazy as it seems. That’s just how ISM chose to structure its index with 50 being even-steven compared to the previous month.
2 Supply Excellence — How to Read the Data: ISM Employment Index // Aug 5, 2009 at 3:09 am
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3 Supply Excellence — How to Read the Data: ISM Manufacturing Orders vs Inventory // Aug 12, 2009 at 1:16 am
[...] far in this series, we’ve looked at the ISM Employment Index and the ISM New Orders Index. But now I want to dig deeper into one of the most revealing ways to look at ISM data; plotting [...]
4 Supply Excellence — August ISM Manufacturing Index: Improvement or false start? // Sep 1, 2009 at 5:43 pm
[...] in the growth. The 4 percentage point increase was driven by significant strength in the New Orders Index, which is up 9.6 points to 64.9 percent, the highest since December 2004. The growth appears [...]
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