ISM index (Institute of Supply Managment' index, formerly NAPM – the National Association of Purchasing Managers)

Institute for Supply Management Chartered Institute of Purchasing and Supply Index. Before January, 2002 - NAPM, National Association of Purchasing Management.

An ISM of more than 50 represents expansion of the manufacturing sector, in case it is less than 50, it represents a contradiction. As a rule, when an ISM is approaching 60, it may signify high pressure economy, inflation increase and the Fed's possible reaction to it (rates increase). If it is less than 40, recession is probable. Recently investors began to use not only the composite index but individual components as well (such as employment and price paid). Thus, ISM index is released before Unemployment Rate and often used to specify Bureau of Labor Statistics data.

This index is composed from five indicators: New Orders (30%), Production (25%), Employment (20%), Supplier Deliveries (15%), Inventories (10%). The Association of Purchasing Managers surveys over 300 purchasing managers nationwide. Participants responses to poll questions are “fast”, “slower”, or “same”. These components constitute the diffusion index, PMI, which value varies from 0 to 100%: a PMI index over 50% indicates that manufacturing is expending, below 50% - vice versa.

Stock market importance: in case recently manufacturing was profitable on the whole and interest rates were quite low, diffusion index increase may signify market growth. In case other indexes indicate that the business cycle is almost completed (inflationary pressure, rates raise), ISM index increase may be a strong signal of active stocks selling.

Frequency: Released monthly, at the first business day at 18:00 (Moscow time)

Source: Institute for Supply Management.

Market importance: Middle.

Analysis: From the end of 2001 the index was in the long-term uptrend, from the beginning of 2004 ISM index was in a downtrend within a year and a half. From the mid of 2005 the indicator has steadied, but resumed sharply falling and decreased to the critical level 50.0 in the second part of 2006.

Analysis:The above ISM index (Employment) is a constituent of general ISM index. As a rule, ISM index (Employment) lags behind general ISM index when the trend reverses. In the mid-term perspective downtrend may form, the indicator is below the critical level at 50.0, which signals deterioration of the labor market.

Conclusion:
ISM index decrease bears risks for the US economic growth slowdown in the mid-term perspective. The ISM index will probably continue falling in January and the first part of 2007. The index release again below 50.0 will be a negative signal for the US economy.