ISM Report On Business

The ISM Report On Business® (ROB), popularly known as the ISM Report, is the collective name for two monthly reports, the Manufacturing ISM Report On Business® and the Non-Manufacturing ISM Report On Business®, published by Institute for Supply Management. The ROB is based on a national survey of purchasing managers tracking changes in the manufacturing and non-manufacturing sectors. It is considered to be one of the most reliable economic barometers of the U.S. economy and gives an important early look at the health of the nation’s economy.[1] In addition to being market moving, the ROB makes an important contribution to the American statistical system and to economic policy. It also has one of the shortest reporting lags of any macroeconomic series.[2]

History

The origin of the Manufacturing ISM Report On Business® can be traced back to 1923 when ISM (known then as the National Association of Purchasing Agents) adopted a polling technique to survey its members on commodities across the country. The results of these surveys were published in ISM's membership publication. For three years, there was no solid structure or guidelines on the implementation of the surveys. Then, in 1926, ISM selected Edward T. Gushee, a purchaser from Detroit, Michigan, as the chairman to supervise the activities of this survey group and decided to expand the scope of information gathered from its membership for the survey. In 1930, the United States was still experiencing the drastic economic impact of the stock market collapse and the Great Depression. In office for a little over one year, U.S. President Herbert Hoover, faced with the traumatic difficulties brought on by these events, was looking for answers. The President and other leading businessmen were concerned over the lack of information to assist them in resolving the economic conditions in the United States. The U.S. Chamber of Commerce had organized, with President Hoover's approval, a committee to gather pertinent business data from companies who were members of the Chamber. However, after numerous efforts to gather information, the committee was disbanded in June 1931. John R. Whitehead, who was the recently elected president of ISM and represented ISM on this committee, wanted to continue the efforts of the committee. He believed that this was a project the purchasing association could carry on, not only for the benefit of the country's economy but also to assist purchasing professionals with performing a more effective job for their organizations during these difficult times. George A. Renard, the executive secretary of ISM at the time, agreed with Whitehead on conducting the program. Under the leadership of Whitehead and Renard, the newly founded Business Survey Committee surveyed the association membership on current business conditions. Renard tabulated the results and then sent them directly to President Hoover. In view of the positive feedback from ISM members and the government on the surveys, ISM was inspired to survey its members and release the information on a regular basis. Except for a four-year interruption during World War II, because of the difficulty of businesses operating under full-scale war conditions, the report has been published since 1931 for ISM's membership and other interested organizations and individuals.[1]

Manufacturing ISM Report On Business featuring the PMI

While the manufacturing report has been published since 1931, in the early 1980s, the U.S. Department of Commerce (DOC) and ISM developed the Purchasing Managers' Index (PMI). The index, based on analytical work by the DOC, adjusts four of the five components of ISM's monthly survey — new orders, production, employment, supplier and deliveries — for normal seasonal variations, adds in inventories, applies equal weights to each and then calculates them into a single monthly index number. An update of research originally done by Theodore S. Torda, the late economist for the DOC, shows a close parallel between growth in real Gross Domestic Product (GDP) and the PMI. The index can explain about 60 percent of the annual variation in GDP, with a margin of error that averaged ± .48 percent during the last ten years. George McKittrick, a former economist at the DOC, said "Not only does the PMI® track well with the overall economy, but the indication provided by ISM data about how widespread changes are, complements analogous government series that show size and direction of change." In January 1989, the Supplier Deliveries Index from the Report became a standard element of the DOC's Bureau of Economic Analysis Index of Leading Economic Indicators. The data was incorporated into the index from June 1976 forward. In January 1996, The Conference Board began compiling this index.

Non-Manufacturing ISM Report On Business

The origin of the Non-Manufacturing ISM Report On Business® can be traced to 1996. Over the years, there had been a shift in ISM's membership from nearly 100 percent manufacturing firms in the 1930s to almost 50 percent non-manufacturing firms by 1996 such as:

Also, by this time, the non-manufacturing sector of the U.S. economy was responsible for about 80 percent of Gross Domestic Product (GDP), the primary measure of economic activity. There also was a trend toward the non-manufacturing share of the economy continuing to increase in the future. While the existing ISM Manufacturing Report On Business® was well-accepted as one of the primary indicators of overall U.S. economic activity, ISM felt that to fully capture all economic activity and to enable all members of ISM to participate in the survey, a non-manufacturing version of the Report On Business should be considered. As a result, in 1996, it formed a committee to explore the development of the Non-manufacturing ISM Report On Business®. By the spring of 1997 the pilot was considered successful. In July of that year, routine monthly data collection began.

Monthly public reporting and release of data debuted in June 1998 with the release of the May 1998 data and ten months of data history. The Non-Manufacturing ISM Report On Business® is released on the third business day of each month, and is based on data compiled from monthly surveys sent to nominally 350 purchasing executives working in the non-manufacturing industries across the country. The process, content and format of the report parallel that of the manufacturing report with only a few differences. Each month, the survey responses reflect change, if any, in the current month's report compared to the previous month. The report covers:

The Non-Manufacturing Index (NMI) which is a weighted composite index for non-manufacturing data (similar to the Purchasing Managers' Index (PMI)) was developed and first published in the January 2008 Non-Manufacturing ISM Report On Business®. This was not available prior to that date because there was insufficient non-manufacturing historical data to develop a composite index.

Methodology

All the ISM indexes are diffusion indexes and are indicators of month-to-month change. The percent response to the "Better," "Same," or "Worse" question is difficult to compare to prior periods; therefore, ISM diffuses the percentages for this purpose. A diffusion index indicates the degree to which the indicated change is dispersed or diffused throughout the sample population. Respondents to ISM surveys indicate each month whether particular activities (e.g., new orders) for their organizations have increased, decreased, or remained unchanged from the previous month. The ISM indexes are calculated by taking the percentage of respondents that report that the activity has increased ("Better") and adding it to one-half of the percentage that report the activity has not changed ("Same") and adding the two percentages. Using half of the "Same" percentage effectively measures the bias toward a positive (above 50 percent) or negative index. As an example of calculating a diffusion index, if the response is 20 percent "Better," 70 percent "Same," and 10 percent "Worse," the Diffusion Index would be 55 percent (20% + [0.50 x 70%]). A reading of 50 percent indicates "no change" from the previous month. Economists and statisticians have determined that the farther the index is away from the amount that would indicate "no change" (50 percent), the rate of change is greater. Therefore, an index of 60% indicates a faster rate of increase than an index of 55% (increased activity is becoming more dispersed), and an index of 35% indicates a faster rate of decrease than an index of 40% (decreased activity is becoming more dispersed). A value of 100 indicates all respondents are reporting increased activity while 0 indicates that all respondents report decreased activity.

Sections of the Reports

Manufacturing:

Non-Manufacturing:

Both include general commentary and a list of commodities that are up in price, down in price and listed in short supply.

Seasonal Adjustments

Seasonal adjustments are made each year in the January reports. The seasonal adjustments are developed by an outside party, formerly the U.S. Department of Commerce, and provided to ISM. As of January 2012, the indexes that are seasonally adjusted are:

Manufacturing:

  • New Orders
  • Production
  • Employment
  • Supplier Deliveries

Non-Manufacturing:

  • Business Activity
  • New Orders
  • Employment
  • Prices

Semiannual Forecasts

The ISM Semiannual Report, released in May and December, provides insight into both the manufacturing and non-manufacturing sectors of the U.S. economy. The data in the current report compares information from the previous report versus what current conditions are. This report also offers a forecast for the next six months.

Historical Data

Historical data is available through subscription.

Media

Most major financial media agencies cover the Report each month on the first and third business day of the month. Articles regularly appear in The Wall Street Journal, Financial Times, MarketWatch, MNI, Bloomberg and others.

Controversy

On June 2, 2014, ISM released the ROB and then revised it twice in the span of about two-and-a-half hours, a highly unusual event. The initial figure of 53.2 was lower than anticipated and indicated a slowing of the pace of factory-sector growth, and this caused stocks to dip instantly. Economists immediately queried the accuracy of the report and determined that ISM had incorrectly applied seasonal adjustments from the previous month.

ISM's final correction of 55.4 was almost in line with Wall Street expectations, indicating brisk growth, and the stock market rebounded quickly and closed the day with a modest gain. In a statement, ISM attributed the errant report to a software glitch that "incorrectly used the seasonal adjustment factor from the previous month."

References

  1. 1 2 Baumohl, Bernard (2005). Hidden Clues to Future Economic Trends and Investment Opportunities. Upper Saddle River, NJ: Wharton School Publishing. pp. 147–156. ISBN 978-0132932073.
  2. ↑ Griffis, Michael (2011). Economic Indicators for Dummies. Hoboken, NJ: John Wiley & Sons. p. 203. ISBN 978-1-118-16389-4.

External links

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