ISM measures current manufacturing activity & can inform trading throughout Market Cycles

What is the ISM Manufacturing Index?

The ISM Manufacturing Index is a monthly economic indicator that measures the activity level of the manufacturing sector in the United States. The index is compiled by the Institute for Supply Management (ISM), a non-profit organization of purchasing and supply management professionals.

The ISM Manufacturing Index is based on a survey of purchasing managers at more than 300 manufacturing firms across the country. The survey asks about various aspects of the manufacturing industry, including production levels, new orders, employment, supplier deliveries, and inventory levels. The responses are then compiled into an index, which is released on the first business day of each month.

A reading above 50 indicates that the manufacturing sector is expanding, while a reading below 50 indicates that it is contracting. The ISM Manufacturing Index is considered a leading indicator of the economy, as the manufacturing sector tends to be sensitive to changes in overall economic activity. As such, it is closely watched by investors, policymakers, and economists as a barometer of the health of the U.S. economy.

How to use the ISM Manufacturing chart index to identify is there is recession coming or if the economy is growing

The ISM Manufacturing Index is considered a leading indicator of the economy, and a significant decline in the index can be a warning sign of an impending recession. Historically, when the index falls below 50, it has often been followed by a recession or a period of economic slowdown (47 is the benchmark number for a recession)

The reason for this is that the manufacturing sector is sensitive to changes in overall economic activity. When consumers and businesses are spending less, manufacturers receive fewer orders, leading to a decline in production, employment, and other indicators measured by the index.

As a result, a sustained decline in the ISM Manufacturing Index can indicate that the economy is in a contractionary phase, which may eventually lead to a recession. However, it’s important to note that the index is just one of many economic indicators that policymakers and economists use to assess the state of the economy, and a decline in the index does not necessarily mean that a recession is imminent.

A reading above 50 can suggest that the economy is growing, as the manufacturing sector is a significant contributor to economic output. An increase in manufacturing activity can lead to higher employment, increased demand for raw materials and other inputs, and other positive spillover effects throughout the economy.

Using the ISM number for planning trading in the Market Cycle

If the chart number is falling and it falls below 50 – indicates a probable recession – consider selling risk assets.

If the chart number is rising and goes above 50 – indicates the economy is recovering and expanding – consider buying risk assets.

ISM & the Global Money Supply

Interesting the Global Money Supply (M2) tracks the ISM Index and historically the ISM leads it by around 9 months.  If this trend continues, then a good rise in the ISM index chart may indicate further Quantitative Easing is on its way which is a bullish sign for risk on assets.