Among many things, one of the most closely watched reports when it comes to forex trading is the ISM’s PMI. PMI stands for Purchasing Manager’s Index and the ISM report indicates business conditions in two main sectors.
The ISM PMI survey is conducted by the US-based Institute for Supply Management (ISM for short). ISM is a non-profit organization. These surveys are leading indicators and they give traders a glimpse into various aspects of the economy.
The ISM’s PMI reports are an important market moving indicator. Not only do these surveys predict the short-term outlook, but the reports are also widely used elsewhere. One of the most common uses of the ISM’s PMI reports is in predicting the non-farm payrolls report.
The NFP report is a monthly employment report which is released by the Bureau of Labor Statistics. Besides serving as a tool to predict payrolls, the ISM reports also show how businesses are faring.
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What Does the ISM PMI Comprise of?
The ISM surveys cover the manufacturing and non-manufacturing sectors. The non-manufacturing sectors are also called the services sectors.
They are conducted based on a survey of various participating firms. Any firm can sign up to receive the survey questions and report to ISM accordingly.
Officially, the ISM’s reports are called as:
- Manufacturing ISMÓ Report on Business
- Non-Manufacturing ISMÓ Report on Business
They are both released during the first week of the month with the results for the previous month.
In the survey, firms are asked to report on a number of factors as listed below:
- Business Activity/Production
- New orders
- Supplier Deliveries
- Backlog of orders
- New export orders
- Inventory Sentiment
- Customer Inventories
Within each of these sections, the firms report on the direction e.g: growing, slowing, increasing. They also report on the rate of change as slower, faster, same (or unchanged) and N/A.
Within the non-manufacturing and manufacturing sectors, there are also sub-industries. In the non-manufacturing sector, there are a total of 16 sub-industries while the manufacturing sector has a total of 18 sub-industries.
How to Read the Employment Survey
As you already know, the ISM survey covers a wide aspect of the business. Among these, the employment section is quite useful in predicting the official payroll reports. The firms participating in the survey are asked to report whether they are experiencing faster or slower business growth.
One of these components reflects on employment or hiring trends. While there is no concrete evidence, many economists believe the employment sector in the surveys has a close relationship with the payrolls report.
The ISM releases their findings in a PDF or an online format. You can find a brief summary of the employment section of the survey. The Employment activity index is expressed as a percentage.
Typically, a rising or a positive print from the previous month (for both manufacturing and non-manufacturing surveys) is a good indicator for the official payrolls report. Other aspects that can influence the payrolls report are the backlog of orders and new orders.
When these components rise, firms tend to expand their hiring in order to meet the demand for the fulfillment of the orders.
Predicting the NFP Figures
While the ISM PMI reports are a good indicator, traders should not solely rely on just the ISM figures. This is because there are a number of other reports to which traders should also pay attention.
Some of the important leading economic indicators that you can also use in forecasting the payrolls are:
- Challenger Job Cuts
- Initial and continuing weekly jobless claims
- ISM NMI and Manufacturing PMI
- UoM Consumer Confidence Report
- Conference Board’s Consumer Sentiment Report
- ADP Private Payrolls Report
Remember that there is no proven methodology that can accurately predict the payrolls report. When trading NFP, you should consider the relationship between the forecast and actual numbers.
The payrolls also feature revisions to previous monthly data that can influence the market reaction. Besides the NFP numbers, wages and the unemployment rate are also important.
Thus, in conclusion, ISM PMI reports can give you some insight into how businesses are faring. When you combine the information with other reports, you can get a fair idea of how the economy is doing as a whole. This can help you get a basic idea of what to expect from the most anticipated event for forex traders, the NFP.