ISM Manufacturing Survey

Definition

The ISM Survey responses reflect the change in the current month compared to the previous month. For each of the indicators measured, this report shows the percentage reporting each response, the net difference between the number of responses in the positive economic direction i.e. higher, better and slower for Supplier Deliveries and the negative economic direction i.e. lower, worse and faster for Supplier Deliveries, and the diffusion index. All the responses are raw unchanged data.

Why is it important?

The PMI is a composite index based on the seasonally adjusted diffusion indexes for five of the indicators with equal weights: New Orders, Production, Employment, Supplier Deliveries and Inventories. Out of its broad representation, it is a very important indicator to look out for simply because it is likely to give a more accurate representation of the economic situation on the ground unlike other indicators, which may have to be gauged against others to get a more accurate direction. Most investors know that it indicates not only the situation on the local scene but also the economic situation in relation to other international transactions. This is because it entails all information regarding the transactions carried out locally as well as abroad. With the aid of these information an investor can clearly deduce which sector has a lot of potential and shift holdings accordingly.

How is it computed?

ISM indicates the departure point between expansion and decline of comparable government series, as determined by regression analysis. The diffusion index includes the percent of positive responses plus one-half of those responding in the same way. The resulting single index number for those meeting the criteria for seasonal adjustments (PMI, New Orders, Production, Employment, Supplier Deliveries and Inventories) is then adjusted to allow for the effects of repetitive intra-year variations resulting primarily from normal differences in weather conditions, various institutional arrangements, and differences attributable to fixed holidays.

The ISM manufacturing survey is compiled basing on data compiled from purchasing and supply executives nationwide. Manufacturing Business Survey Committee collects responses from all NAICS code categories. All information pertaining to the code categories are collected and compiled to get the general outlook of all transactions including the old ones, the current as well as future orders of goods and products. This information is collected and compiled on a monthly basis from all states across the US and is then submitted to the US Census bureau before final release.

How does it affect forex trading?

The forex trade is very dependent on the value and amount of goods and services sold out off and into the economy. It is thus very natural to register a strong currency at times when the survey registers high figures since this means higher production is in progress. More cash low is experienced into the market when manufacturers are at their highest pace of production. Great manufacturing productions especially of goods meant for export are a good source of foreign exchange. By keeping track of all goods manufactured and ordered can be a good source of information to the government to adjust its interest rates accordingly. When the manufacturing productions are anticipated to raise in the near future, the federal bank can strategize on how to balance its cash flow to meet its long-term objectives. This will automatically affect the exchange rates at the forex.

In other instances, when orders for goods manufactured are higher in foreign countries basing on the existing orders, the currency must shift its value in respect to the currency of the destination of the orders. This is to mean that the currency will exchange at a higher rate against the currency of the state where the products are destined for sale as they will be transacting more business from the local economy, a venture that will demand the use of the local currency to fulfill. It should be notable that the local currency will have the upper hand when products are being sold from the country to other parts and vice-versa when stuff is purchased from other regions into the country.

Impact on stock market

The stock market is very much influenced by the trends of the ISM Manufacturing survey. Any investor who expects to make any profits should try to use technical analysis to gauge the possibility of market shares rising or dropping in prices. Gauging these trends accurately can be a very vital guideline in deciding where to invest and when. Reducing the guesswork out of investment in stocks can make a very big difference in the out come of your investment. There is no better way to gauge the performance of specific sectors of the economy than by looking at their orders both pending and current. A sector that has so much in pending orders is certainly the right place to invest your cash whether on long term or short term. This is because it clearly indicates the anticipated rise in the sector’s performance. Investing in such shares early enough gives you the best chance of reaping huge profits before every body reads the signs and the shares start to skyrocket due to increased demand. If you are smart, enough you only need to hold your shares until the trends become visible. At this opportune time, you can dispose off your shares and look for new shares that have good orders and are likely to improve in the near future.

The IMS manufacturing survey has been proven to impact directly on the GDP of the population. A high GDP rating translates into higher spending ability and that in turn leads to the high demand for stock as people have the cash to reserve in stocks. The economy in this situation should be registering growth. In case the IMS survey indicates the opposite, thus, a low record then the reverse effect will be evident in all other related areas such as the GDP and the effects automatically spill over to the stock market shares.

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