Manufacturing output refers to the total inflation-adjusted value of output produced by manufacturers. Announcements of manufacturing output include month-over month and year-over-year changes in manufacturing production. The manufacturing sector accounts for almost 80% of total Industrial Production and tends to have a big impact on market behavior. It is a leading indicator of economic health as manufacturing output reacts quickly to ups and downs in the business cycle.
The ISM Manufacturing Composite Index is released monthly by the Institute of Supply Management which tracks the amount of manufacturing activities in the previous month. Data for the index comes from a monthly survey done by purchasing managers from approximately 300 manufacturing firms of 21 industries in 50 states. Queries in the survey includes general direction of production, new orders, order backlogs, manufacturers' inventories, customers' inventories, employment, supplier deliveries, exports, imports, and prices. The five equally weighted components that form the composite consist of new orders, production, employment, supplier deliveries, and the manufacturer's inventories. The index value ranges between 0 and 100. Whenever the index value falls below 50, it tends to indicate an economic recession, especially when the trend continues for several months consecutively. A value substantially above 50 most likely means a time of economic growth.
Manufacturing Output reacts quickly to ups and downs in the business cycle, and is correlated with consumer conditions like unemployment rates and earnings. The ISM manufacturing index gives a detailed picture of the manufacturing sector such as the level of activities and the general direction of the manufacturing industry. Since the manufacturing industry contributes to majority of the cyclical variability in the economy, the index has a big influence on the markets. Some of the ISM sub-indices provide insights into commodity prices and signals for potential inflation developing. If the index increases too rapidly, this may lead to excessive consumption and inflation pressure. Hence, the Federal Reserve monitors this report closely as it helps to determine the direction of interest rates when inflation signals are flashing in the data provided. Therefore, the bond market is also highly sensitive to this report.