Institute for Supply Management, ISM Manufacturing Index (Measure of Manufacturing Activity) Web: http://www.ism.ws/ISMReport/index.cfm No monthly revisions,…but reassessments of seasonal adjustment factors in January ISM is a private, Tempe, Arizona based group that represents corporate purchasing managers – procure production materials and supplies to make products – in the goods-producing industry – highly sensitive to the ebb and flow overall economic activity. Survey results come out the first business day of every month (very timely) ISM surveys 400 companies, representing 20 industries, to assess if activity is rising, falling or unchanged in the following fields: New Orders (30%) - by purchasing agents Production (25%) - manufacturing output Employment (20%) – hiring by the company Supplier deliveries/Vendor performance (15%) – speed of supplier delivery Inventories (10%) – the rate of liquidating manufacturers’ inventories Purchasing Managers Index (PMI) is a compilation of the 5 components listed above weighted by the given percentages. The PMI is a diffusion index, showing changes in month to month activity, but not actual levels of production. Component number = % reporting rising + ½ % reporting no change PMI is an effective gauge of business cycle turning points If PMI > 60 for a sustainable period with the economy operating above potential => Fed raising interest rates If PMI > 50 => expanding manufacturing sector, with every additional full index point adding 0.3 percentage points of economic growth over next 12 months. If PMI = 50 => no change in manufacturing activity, with Y/Y = 2.5% If 43 < PMI < 50 => contracting manufacturing sector, but economy may still be growing If PMI < 43 on a sustained basis => recession. Expect Fed to lower interest rates. ISM Non-Manufacturing Business Activity Index – measures service sector business activity (non-manufacturing industries represent 80% of economy) Service sector (medical care, communication, financial, consulting, entertainment, legal, insurance, lodging) is not as cyclical as manufacturing A reading of 50 shows the same percentage of managers reporting higher activity as lower activity Index > 50 indicates growth in service industry Index < 50 indicates contraction in service industry ---------------------------------------------------------------------------------------------------------------------------------------------------- -------------- Market Analysis: Bonds: PMI > 50 and Y > Y Pot => P/P => D Bonds => i Bonds Stocks: PMI > 50 and Y < Y Pot => Y/Y => profits => P Stocks Dollar: PMI < 50 => Y/Y => i Bonds => dollar
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Institute for Supply Management, ISMManufacturing Index
(Measure of Manufacturing Activity)
Web: http://www.ism.ws/ISMReport/index.cfmNo monthly revisions,…but reassessments of seasonal adjustment factors in January
ISM is a private, Tempe, Arizona based group that represents corporate purchasing managers – procure production materials and supplies to make products – in the goods-producing industry – highly sensitive to the ebb and flow overall economic activity.
Survey results come out the first business day of every month (very timely)ISM surveys 400 companies, representing 20 industries, to assess if activity is rising, falling or unchanged in the following fields:New Orders (30%) - by purchasing agentsProduction (25%) - manufacturing outputEmployment (20%) – hiring by the companySupplier deliveries/Vendor performance (15%) – speed of supplier deliveryInventories (10%) – the rate of liquidating manufacturers’ inventories
Purchasing Managers Index (PMI) is a compilation of the 5 components listed above weighted by the given percentages. The PMI is a diffusion index, showing changes in month to month activity, but not actual levels of production.
Component number = % reporting rising + ½ % reporting no change
PMI is an effective gauge of business cycle turning pointsIf PMI > 60 for a sustainable period with the economy operating above potential => Fed raising interest rates If PMI > 50 => expanding manufacturing sector, with every additional full index point adding 0.3 percentage points of economic growth over next 12
months. If PMI = 50 => no change in manufacturing activity, with Y/Y = 2.5%If 43 < PMI < 50 => contracting manufacturing sector, but economy may still be growingIf PMI < 43 on a sustained basis => recession. Expect Fed to lower interest rates.
ISM Non-Manufacturing Business Activity Index – measures service sector business activity (non-manufacturing industries represent 80% of economy)
Service sector (medical care, communication, financial, consulting, entertainment, legal, insurance, lodging) is not as cyclical as manufacturingA reading of 50 shows the same percentage of managers reporting higher activity as lower activityIndex > 50 indicates growth in service industryIndex < 50 indicates contraction in service industry
Keynesian ISLM ModelModel Explains 2 things:1. Determination of Output, Y2. Why Ye < YFE
Aggregate Expenditure Model: focuses on the relationship betweenspending (AE) and production (Y) assuming fixed price level.(nominal = real) => Y without P
AE = C + I + G + X-M
Macroeconomic EquilibriumAE = Y(no in inventories => no in production rate)
Assume no organic Y/Y %(Y/L) = 0L/L = 0
Domestic Production, GDP, Y
AE = C + I + G + XInventory
Equilibrium ConditionInflow = OutflowQS = QD
Foreign Production, M
Macro EquilibriumY = AE
The Circular Flow Diagram
YOutputIncome
AE = C+I+G+X-M
AE = Y
Y05Pot
Recent U.S. Economic PerformanceHousing Market Contraction
(Measure of Manufacturing Activity in the Midwest Region)
Web: https://www.ism-chicago.org/index.cfm?Reassessments of seasonal adjustment factors in January
The Chicago chapter is an affiliate (one of ten local ISM chapters) of the Institute for Supply Management, (ISM). The Chicago group publishes their survey one business day before the national ISM manufacturing number is released.
The Chicago Business Barometer Index, BBI, moves in same direction as the national ISM numbers about 60% of the time and has a 90% correlation regarding their magnitude change. But for financial market traders, the direction is more relevant than the level of change.
Survey region covers the industrial heartland of Illinois, Indiana and Michigan, which contains a large part of the auto and auto parts sectors. The Federal Reserve monitors the Chicago NAPM report to study conditions in the manufacturing sector and check for signs of production imbalances.
ISM-Chicago, queries 200 purchasing managers regarding their business activity to assess if activity is rising, falling or unchanged. Survey results are compiled into a diffusion index, (BBI), based on a weighted average of 5 subcomponent indexes:New Orders (35% weight) - by purchasing agentsProduction (25% weight) - manufacturing outputEmployment (10% weight) – hiring by the companySupplier deliveries/Vendor performance (15% weight) – speed of supplier deliveryOrder backlogs (15% weight)
The Business Barometer Index (BBI) is a compilation of the 5 components listed above weighted by the given percentages. The BBI is a diffusion index, showing changes in month to month activity, but not actual levels of production.
Component number = % reporting rising + ½ % reporting no changeThe difference between % reporting rising and % reporting falling:(% - %) = (Index - 50) x 2. (Recall, 100% = % + no chg % + % and Index = % + ½ (no chg %)
ISM-Chicago is an effective gauge of business cycle turning points:If BBI > 50 indicates expansion in business activity. If BBI < 50 indicates contraction in business activity.
Data for the Chicago BBI is not the same data used to calculate the National ISM Index.------------------------------------------------------------------------------------------------------------------------------------------------------------------