ISM Manufacturing Has Contracted 23 Of The Last 24 Months

While most of the headline economic numbers remain strong, the ISM Manufacturing Index continued to show contraction. This metric is specific to manafucaturing in the United States and has shrunk 23 of the last 24 months.

The reasons are likely tied to decliningi consumer spending as the Covid boom gets further and further away. However, the mystery remains why the remainder of the U.S. economy has stayed so strong.

Many would draw the conclusion that the general economy has remained strong because the stock market has been making new all-time highs. This keeps the upper end of the income spectrum spending while the lower end has totally shut down with inflation crushing them.

The latest ISM Manufacturing Index came in at 46.5. Anything below 50 shows contraction.

Let's learn more about the ISM Manufacturing Index below.

The ISM Manufacturing Index, also known as the Purchasing Managers' Index (PMI), is a closely watched economic indicator that provides insight into the health of the U.S. manufacturing sector. It's compiled and published monthly by the Institute for Supply Management (ISM).

Here's how it works:

• Survey: The ISM surveys purchasing managers at over 300 manufacturing companies across the United States. These managers are asked about various aspects of their business, including new orders, production levels, employment, supplier deliveries, and inventories.
• Diffusion Index: For each of these indicators, the percentage of managers reporting improvement, no change, and deterioration is calculated. The diffusion index is then derived by adding the percentage reporting improvement to half the percentage reporting no change.
• Overall Index: The overall ISM Manufacturing Index is a composite index based on the diffusion indices for five key areas: new orders, production, employment, supplier deliveries, and inventories. Each area is assigned a weight, with new orders carrying the most weight.

Interpreting the Index:

• Above 50: An index reading above 50 indicates expansion in the manufacturing sector compared to the previous month. Higher readings generally signal stronger growth.
• Below 50: A reading below 50 indicates contraction in the manufacturing sector. Lower readings suggest a weaker manufacturing environment.

Significance:

• Economic Indicator: The ISM Manufacturing Index is considered a leading economic indicator, meaning it can provide clues about the future direction of the overall economy.
• Market Impact: The index can significantly influence investor and business confidence, affecting stock prices, interest rates, and other financial market variables.
• Business Decisions: Businesses use the index to make informed decisions about production, inventory, and employment levels.