Unexpected ISM Manufacturing Index Hopefully a Sign of Things to Come
On the first business day each month the Institute for Supply Management (ISM) releases one of the leading economic indicators used by economists, investors, media channels and organizations to gauge the pulse of the U.S. economy.
With today's announcement, the ISM manufacturing index jumped to 55.9%, up from November's 53.6%.report. This was a catalyst for the market rally which most of us hope confirms signs of a rebounding economy and provides a glimpse into the future business climate for American manufacturing–and domestic tooling suppliers.
Most of us understand the role manufacturing has in the short and long-term viability of our economy and safety. A quick look at manufacturing's multiplier effect (a key term economists use to describe how deep linkages run for a given sector of the economy) shows a 4:1 ratio which is by far one of the most powerful recipes for stability. If Joe Brown's Tool and Die Shop employs 250 machinists, diemakers, designers and programmers it essentially creates and sustains 1,000 other jobs in our economy. Service-based jobs are not even close with an approximate 1.4:1 multiplier effect. You do the math.
So what exactly does this much-anticipated economic barometer really mean? How is it calculated?
A result over 50% tends to indicate expansion in manufacturing while anything under 50% likely means we're facing a contraction of sorts.
December's index is encouraging because it's the highest score in the last four years and the fifth month in a row it's increased.
The ISM Business Survey Committee (about 300-400 purchasing executives across almost two dozen sectors within manufacturing) are sent a quick survey each month to provide a very basic response gauging their month-to-month activity levels for nine sub-indices. Of those the five most important on a weighted scale are:
- New orders placed
- Supplier deliveries
- Production Levels
- Employment levels or activity
- Inventory levels
Since this is technically a "leading indicator" the market or economy's health is supposed to rise or fall in the coming months or quarters based on the index. If that theory holds true then those making up this leading indicator must include some of the providers of tooling.
Either way it's always nice when we can read and share news that includes the words "manufacturing" with "positive" or "optimistic".
Joe J. Brown
