Institute for Supply Management (ISM)

The Institute for Supply Management (ISM) is a not-for-profit organization that serves as a leading authority on procurement and supply chain management. While it provides education and certification for professionals in the field, for investors, the ISM is famous for one thing: its monthly economic reports. These reports, based on surveys of purchasing and supply executives across the United States, are among the most reliable and closely watched indicators of economic health. Think of the ISM as taking the pulse of the American economy directly from the people who are making the day-to-day purchasing decisions that fuel production and services. Their collective sentiment and activity provide a fantastic, real-time snapshot of where the economy might be heading next.

For a value investing practitioner, understanding the broader economic environment—the “macro” picture—is crucial. It helps you understand the context in which your carefully selected companies operate. The ISM’s reports are a powerful tool for this, offering a forward-looking glimpse into economic trends before they show up in official government data like GDP reports.

The headline number in the ISM's reports is the Purchasing Managers' Index, or PMI. There are two main versions: one for manufacturing and one for services. The PMI is an index created from the survey results, and it's incredibly simple to interpret:

• A reading above 50 indicates that the sector (manufacturing or services) is expanding.
• A reading below 50 indicates that the sector is contracting.
• A reading of exactly 50 means there is no change.

The direction and velocity of the PMI are just as important as the absolute number. A PMI reading that jumps from 52 to 56 signals accelerating growth, which is a very bullish sign. Conversely, a drop from 51 to 48 is a major red flag, suggesting the economy might be heading for a recession. The PMI is a composite index based on several sub-indices, with New Orders being one of the most important, as it signals future production demand.

A value investor doesn't use the PMI to time the market, but to inform their research and decision-making process.

• Strong Economy (Rising PMI > 50): When the economy is humming along, cyclical businesses (like industrials, materials, and consumer discretionary) tend to do well. A strong PMI might prompt you to investigate if any companies in these sectors are trading below their intrinsic value, poised to benefit from the economic tailwind.
• Weak Economy (Falling PMI < 50): When the PMI signals a slowdown, it's a time for caution. This environment can create fear in the market, pushing the stocks of excellent, durable companies down to bargain prices. A value investor might use a weak PMI as a signal to hunt for opportunities in defensive sectors (like consumer staples and healthcare) or to build a “shopping list” of high-quality companies they want to buy if the market overreacts and sells them off cheaply.

Crucially, the ISM data is just one piece of the puzzle. It helps you understand the weather, but you still need to perform deep fundamental analysis on the individual ship (the company) before you invest.

You'll hear market commentators talk about two distinct ISM reports each month. It's helpful to know the difference.

Often just called the ISM Manufacturing PMI, this report is released on the first business day of every month. It focuses on the industrial and factory side of the economy. For much of the 20th century, this was the most important economic report, as manufacturing was the engine of the U.S. economy. While its relative importance has declined, it remains a vital indicator of demand for physical goods, global trade, and corporate capital spending.

Also known as the ISM Services PMI or, historically, the Non-Manufacturing Index (NMI), this report is released on the third business day of every month. It covers the vast services sector, which includes everything from healthcare and finance to retail and information technology. In modern developed economies like the U.S. and in Europe, the services sector makes up the overwhelming majority of economic activity, making this report arguably even more important today for gauging the overall health of the economy.

Economic indicators like the ISM reports are fantastic for developing a high-level view. They help answer the question, “Is the economic sea calm or stormy?” However, as a disciple of Benjamin Graham, your primary focus should always remain on the business itself. A weak PMI doesn't automatically mean you should sell a great company, nor does a strong PMI justify overpaying for a mediocre one. Use the ISM data as a valuable source of context to guide your search for wonderful businesses trading at fair prices, not as a shortcut to making investment decisions.