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What to Make of the Fall in the October ISM New Orders Index

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ISM New Order Index

The Institute of Supply Management (or ISM) publishes a monthly report on changes in new orders, supplier deliveries, inventories, production, and employment. This report is prepared by collecting data from 400 industries (XLI) across the country.

The ISM New Order Index is one of the components of Conference Board Leading Economic Index (or LEI) with a weight of ~15.9% on the index.

The key characteristic of this index is that it is a diffusion index with a value of 0–100. The survey only provides either a positive or negative response.

If the positive responses are greater than 50, the economy is considered to be in an expansionary cycle. Red flags are raised when there is a continuous decline in the index value.

Recent data release

The ISM New Order Index for October was reported to be 63.4 compared to a reading of 64.6 in September. Although there was a drop in the index, it is still close to its six-month peak, which was recorded in October.

Increased demand due to the rebuilding efforts after the hurricanes drove the index higher and keeps it supported.

The ISM New Orders Index had a net positive impact of 16% on the leading economic index in October.

Impact of ISM Index on the markets

The ISM Index is one of the first economic data reports to be released each month, and markets (SPY) (QQQ) react to any surprises in this index. If the ISM Index is slightly above 50, the impact on the markets (ITOT) is usually negligible.

If the value of this index becomes volatile (VXX) or continuously drops, it is considered a worrying sign as the previous recessions were preceded by a fall in the ISM index.

In the next part of this series, we’ll discuss the only negative contributor to the October Leading Economic Index.

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