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Reference

PMI background

This page gives background on (1) the Institute for Supply Management's Reports on Business and the associated indices of business conditions, specifically, and (2) PMIs more generally.

Summary

2 Jun 2010.

The Institute for Supply Management publishes two monthly “Reports on Business”, one in manufacturing and one in non-manufacturing (often referred to as the service sector). Each report includes a number of component diffusion indices. Each of the component indices measures the net fraction of companies surveyed for which some measure (e.g. new orders) improved from the previous month.

The Manufacturing ROB has components measuring month-to-month change in ten categories at 300 companies. Five of the components, new orders, production, employment, supplier deliveries and inventories, are seasonally adjusted and combined into the PMI (Purchasing Manager's Index).

The Non-manufacturing ROB has components measuring month-to-month change in another 10 categories at 375 companies. Beginning in Jan 2008, a composite NMI has been calculated, based on the component indices of business activity, new orders, employment and supplier deliveries. Before Jan 2008 the business activity component was often quoted as a general indicator.

PMI and NMI values above 50 are generally indicative of an increase in actual output, and values below 50 are indicative of decrease. Both indices are widely-noted indicators of business conditions. Diffusion indices are, in general, better indicators of direction than magnitude, so one should not read too much into small changes.

The ISM concept has inspired many other cases. For example the global PMI from JPMorgan Chase and the China PMI from HSBC are widely followed.

Graph

2 Jun 2010. Data through Mar 2010.

PMI values are the composite ISM manufacturing index (see Sources below). The manufacturing sub-index of the US Index of Industrial Production is from the Federal Reserve. GDP is from the BEA NIPA table 1.1.6.

Note (1) that the PMI values do show a correlation with the change in manufacturing output (slope of the black line) but (2) that in the boxed are output increased steadily while the PMI varied considerably.

Highlights

  • General (3 Mar 2008) The ISM puts out two monthly “Reports on business”, one in manufacturing and one in non-manufacturing (the news often substitutes “service sector” for “non-manufacturing”).
  • Component calculation (6 Apr 2008) “Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment and Supplier Deliveries), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher and slower for Supplier Deliveries) and the negative economic direction (lower and faster for Supplier Deliveries). Responses represent raw data and are never changed. Data is seasonally adjusted for Business Activity, New Orders, Prices and Employment.”
  • Composites (2 Jun 2010) Details are not given for the computation of the composite indices from their components.
  • Manufacturing (3 Mar 2008) The manufacturing ROB has been published since 1931. It has components measuring month-to-month change in production, new orders, new export orders, imports, employment, inventories, prices, leadtimes, and the timeliness of supplier deliveries at 300 companies included in a survey committee. All of these are measurable quantities, so this is a diffusion index based on data rather than sentiment. Based on joint work between the ISM and Commerce, five of the components, new orders, production, employment, supplier deliveries and inventories, are seasonally adjusted and combined (with equal weight) into the PMI (Purchasing Manager's Index). The PMI can explain about 60% of the annual variation in GDP.
  • Non-manufacturing (3 Mar 2008) The non-manufacturing ROB has been produced since Jun 1998. It has components measuring month-to-month change in Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment and Supplier Deliveries at 375 companies included in a survey committee. Beginning in Jan 2008, a composite NMI index has been calculated, based on the diffusion indexes of Business Activity (seasonally adjusted), New Orders (seasonally adjusted), Employment (seasonally adjusted) and Supplier Deliveries. Before Jan 2008 the “Business Activity” component was often quoted as a general indicator.

Sources

See also

Overview of the Reports on Business

Undated. ISM web site.

http://www.ism.ws/ISMReport/content.cfm?ItemNumber=10743&navItemNumber=12944

“The Institute for Supply Management™ Manufacturing and Non-Manufacturing Report on Business®”

“The Institute for Supply Management™ ISM Manufacturing Report On Business® is considered by many economists to be the most reliable near-term economic barometer available. Except for a four-year interruption during World War II, the Report has been published monthly since 1931 for the guidance of supply management professionals, economists, analysts, and government and business leaders. … The reason the ISM Manufacturing Report On Business® is so highly respected is that it is based on hard data rather than on conjecture. The Institute's Business Survey Committee, composed of more than 300 purchasing and supply executives from across the country, provide the data. Members of the committee respond anonymously and confidentially to a monthly questionnaire designed to elicit fact, not opinion, about changes in production, new orders, new export orders, imports, employment, inventories, prices, leadtimes, and the timeliness of supplier deliveries in their companies comparing the current month to the previous month. The questionnaire also solicits data on commodities, which are up or down in price and in short supply, and asks for general remarks on business conditions. The responses of the committee members mirror the economic activities of the manufacturing sector, nationally, ensuring a report that accurately represents current business conditions. In February 1992, the PMI was developed by the U.S. Department of Commerce (DOC) and ISM. The index, based on analytical work by the DOC, adjusts five components of the Institute's monthly survey — new orders, production, employment, supplier deliveries and inventories — for normal seasonal variations, 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, an 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.” …

Covering the Non-Manufacturing sector, ISM debuted its newest economic report in June of 1998. 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 more than 375 purchasing executives working in the non-manufacturing industries across the country. Each month, these survey responses reflect change, if any, in the current month's report compared to the previous month. The report covers Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment and Supplier Deliveries. Beginning with the January 2008 Non-Manufacturing Report On Business®, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector. The NMI is a composite index based on the diffusion indexes for four of the indicators with equal weights: Business Activity (seasonally adjusted), New Orders (seasonally adjusted), Employment (seasonally adjusted) and Supplier Deliveries.”

ISM methodology

6 Sep 2007. ISM website.

http://www.ism.ws/ISMReport/NonMfgROB.cfm?navItemNumber=12943

“The Non-Manufacturing ISM Report On Business® is based on data compiled from purchasing and supply executives nationwide. Membership of the Non-Manufacturing Business Survey Committee is diversified by NAICS, based on each industry's contribution to gross domestic product (GDP). The Non-Manufacturing Business Survey Committee responses are divided into the following NAICS code categories: Agriculture, Forestry, Fishing & Hunting; Mining; Utilities; Construction; Wholesale Trade; Retail Trade; Transportation & Warehousing; Information; Finance & Insurance; Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Management of Companies & Support Services; Educational Services; Health Care & Social Assistance; Arts, Entertainment & Recreation; Accommodation & Food Services; Other Services*; and Public Administration.

Survey responses reflect the change, if any, in the current month compared to the previous month. For each of the indicators measured (Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment and Supplier Deliveries), this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction (higher and slower for Supplier Deliveries) and the negative economic direction (lower and faster for Supplier Deliveries). Responses represent raw data and are never changed. Data is seasonally adjusted for Business Activity, New Orders, Prices and Employment. The remaining indexes have not indicated significant seasonality.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index reading above 50 percent indicates that the non-manufacturing economy in that index is generally expanding; below 50 percent indicates that it is generally declining. Supplier Deliveries is an exception. A Supplier Deliveries Index above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries.”

A non-US example: HSBC on China

6 May 2010. HSBC press release.

https://www.hsbc.com/1/PA_1_1_S5/content/assets/emi/2010/1005_pmi_press_china_services_en.pdf

“HSBC China Services PMI (with Composite PMI data)”

“The HSBC China Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private service sector companies. The panel has been carefully selected to accurately replicate the true structure of the services economy.

The HSBC China Composite PMI is a weighted average of the Manufacturing Output Index and the Services Business Activity Index, and is based on original survey data collected from a representative panel of over 800 companies based in the Chinese manufacturing and service sectors.

Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid- month. For each of the indicators the ‘Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the ‘diffusion' index. This index is the sum of the positive responses plus a half of those responding ‘the same'.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change. An index reading above 50 indicates an overall increase in that variable, below 50 an overall decrease.”