Institute of Supply Management (ISM) Manufacturing Price Index: an Important Economic Tool

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The ISM Manufacturing Price Index is a monthly-basis indicator that has a strong correlation to industrial inflation in which includes goods and services. It’s treated as a very important and trusted economic tool which tracks the amount of manufacturing activity in the earlier month. The index is based on surveys of more than 300 manufacturing companies all around the U.S. and it monitors employment, production stocks, new orders, and supplier deliveries. The surveys are being held by the Institute of Supply Management (ISM).

Based on the data from those surveys, a multiple distribution index is formed to observe conditions in national manufacturing. The values for the index can take between 0 – 100.  If the index number reaches 50 points or more, it can be taken that the economy is growing up while if the index number reaches below 50 points, it indicates a decline in the manufacturing sector, especially if it continues over several months.

Investors will be able to get better understanding of the national economic conditions by looking at the ISM Manufacturing Price Index.  If the index goes up, they may consider that the stock markets are going in the same trend too, because of higher business profits. The ISM Manufacturing Price Index also influences the currency value. When the ISM Manufacturing Index increases, the USD will follow the same trend (bullish). It applies vice versa if the ISM Manufacturing Price Index is declining.

The bond markets will go in the opposite trend as the ISM Manufacturing Price Index increases due to its sensitivity to potential inflation. In other words, if the ISM Manufacturing Price Index is going up, the bond markets will react negatively (slowing down).

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