PMI and ISM Manufacturing Index
What PMI Data Measures
The Purchasing Managers Index (PMI) captures business conditions through surveys of purchasing managers—the executives responsible for buying materials, equipment, and services. Their collective views provide a real-time snapshot of economic activity.
Who publishes PMI data:
- ISM (Institute for Supply Management): The original US manufacturing and services PMIs
- S&P Global (formerly IHS Markit): Competing PMIs with different methodology
The point is: PMI data is released before most hard data (industrial production, factory orders), making it a leading indicator of economic direction.
The 50-Level Threshold
PMI readings are diffusion indexes that oscillate around 50:
| Reading | Interpretation |
|---|---|
| Above 50 | Expansion—more respondents reporting improvement than deterioration |
| Exactly 50 | No change |
| Below 50 | Contraction—more respondents reporting deterioration |
Critical nuance: A reading of 48 does not mean manufacturing output fell 2%. It means more purchasing managers reported declining activity than improving activity. The rate of change and direction matter more than the absolute level.
Historical context:
- Long-run average: approximately 52-53
- Strong expansion: above 55
- Deep contraction: below 45
ISM Manufacturing Index Components
The headline ISM Manufacturing PMI is a composite of five equally weighted components:
| Component | What It Measures |
|---|---|
| New Orders | Forward-looking demand signal |
| Production | Current output levels |
| Employment | Hiring and layoff trends |
| Supplier Deliveries | Supply chain conditions |
| Inventories | Stock levels relative to demand |
The calculation: ISM Manufacturing PMI = (New Orders x 0.20) + (Production x 0.20) + (Employment x 0.20) + (Supplier Deliveries x 0.20) + (Inventories x 0.20)
Worked example (October 2024):
- New Orders: 47.1
- Production: 46.2
- Employment: 44.4
- Supplier Deliveries: 52.0
- Inventories: 42.6
- Headline PMI: 46.5 (contraction territory)
Why New Orders Matters Most
Among the five components, new orders is the most forward-looking. A drop in new orders today signals lower production in coming months.
The signal hierarchy:
- New orders decline →
- Production slows (1-2 month lag) →
- Employment adjusts (2-4 month lag) →
- Inventories correct (variable lag)
The durable lesson: Watch new orders to anticipate where the headline will be in 60-90 days.
Prices Paid: The Inflation Signal
The ISM also reports a prices paid subindex (not included in the headline). This measures input cost pressures.
| Prices Paid Level | Interpretation |
|---|---|
| Above 60 | Significant price pressures |
| 50-60 | Moderate price increases |
| Below 50 | Prices falling (deflation signal) |
Why it matters: Elevated prices paid combined with slowing new orders signals stagflationary pressure—the worst combination for policymakers.
Supplier Deliveries: The Supply Chain Signal
Supplier deliveries works inversely to other components:
- Above 50: Slower deliveries (supply constraints)
- Below 50: Faster deliveries (ample capacity)
Pandemic example: Supplier deliveries spiked above 70 in 2021-2022 as supply chains seized up. By late 2024, it normalized to 50-52.
ISM vs. S&P Global PMI
Both surveys measure manufacturing conditions but with different samples and methods:
| Dimension | ISM | S&P Global |
|---|---|---|
| Sample size | ~400 companies | ~800 companies |
| Company size focus | Larger companies | Mix of sizes |
| History | Since 1948 | Since 2007 |
| Release timing | First business day | Usually 1-2 days earlier |
The practical point: When ISM and S&P Global diverge significantly, investigate why. Large company conditions may differ from small company conditions.
PMI and GDP Correlation
Research suggests approximate PMI-to-GDP relationships:
| PMI Level | Approximate GDP Growth |
|---|---|
| 60 | ~5% annualized |
| 55 | ~3% annualized |
| 50 | ~1% annualized |
| 45 | ~-1% annualized |
| 40 | ~-3% annualized |
Caveat: These relationships are rough guides, not precise conversions. Manufacturing is only about 11% of US GDP.
Common Pitfalls
- Treating PMI as GDP: Manufacturing PMI measures one sector, not the whole economy
- Ignoring duration: A single month below 50 is not recessionary; six months below 50 is concerning
- Conflating ISM and S&P Global: Different surveys with different respondents
- Missing seasonal adjustment issues: Some months have consistent seasonal biases
Manufacturing vs. Economy Divergence
Manufacturing can diverge from the broader economy:
- 2015-2016: Manufacturing recession (below 50 for months) while services expanded
- 2022-2024: Manufacturing contracted while services remained resilient
The point is: In a services-dominated economy (services = ~70% of GDP), manufacturing weakness does not guarantee recession.
Checklist for ISM Manufacturing Day
Before the release (first business day of month):
- Know consensus expectation for headline and key components
- Note prior month's reading and trend direction
- Check for known distortions (strikes, hurricanes)
After the release:
- Compare headline to consensus
- Check new orders and employment components separately
- Note prices paid for inflation signal
- Compare ISM to S&P Global reading (if already released)
Next Step
Track the ISM Manufacturing PMI new orders subindex alongside the headline for six months. Note how often changes in new orders precede changes in the headline by 1-2 months. This exercise builds intuition for using PMI as a leading indicator.