What is the ISM Manufacturing Index?

The ISM Manufacturing Index, also known as the Purchasing Managers' Index (PMI), is a monthly diffusion index published by the Institute for Supply Management. It is based on a survey of purchasing managers at roughly 400 manufacturing companies, asking them whether key business conditions (new orders, production, employment, supplier deliveries, and inventories) are better, same, or worse compared to the prior month.

The index is constructed so that a reading above 50 indicates that manufacturing activity is expanding, while a reading below 50 indicates contraction. The threshold at 50 is not arbitrary: it represents the breakeven point where equal numbers of respondents report improvement and deterioration. Sustained readings above 55 suggest robust expansion, while readings below 45 indicate significant contraction.

Five sub-indices compose the headline PMI, each weighted equally at 20%: New Orders (the most forward-looking component, as orders precede production), Production, Employment, Supplier Deliveries, and Inventories. The New Orders sub-index is the most closely watched because it provides the earliest signal of demand trends. The Prices Paid sub-index (not part of the headline composite) is important for inflation monitoring.

The ISM Manufacturing Index is released on the first business day of each month, covering the prior month. This early release date, combined with its leading indicator properties, makes it one of the most market-moving economic reports. A reading significantly above or below expectations can move Treasury yields, the dollar, and equity indices. The ISM Services Index (released two days later) covers the larger services sector and has gained importance as the US economy has become increasingly services-oriented.

Historically, a sustained decline in the ISM below 50 has been associated with economic slowdowns and recessions. However, because manufacturing represents only about 11% of US GDP (services dominate at roughly 70%), the ISM can remain below 50 while the broader economy continues to grow, as occurred during the 2022-2023 manufacturing recession that did not spread to the overall economy. Context about the services sector and labor market is essential for proper interpretation.