The Institute for Supply Management (ISM) regularly releases several economic indicators that are important to forex traders. The ISM, which was founded in 1915, services 40,000 business professionals by focusing on data and research on supply chain management. In the beginning of each month the ISM publishes the ISM Purchasing Managers Index (PMI). Although the ISM publishes several reports the PMI has the largest impact on the forex market.
What Exactly Does the PMI Measure?
ISM publishes the manufacturing PMI on the first business day of each month. This index is derived from surveys taken from 400 manufacturing purchasing managers. The surveys include managers from various sectors and factors in five different indicators: inventories, employment, speed of supplier deliveries, level of production and new customer orders. On the second business day of each month the ISM publishes the construction PMI and then publishes the services PMI on the third business day.
How To Interpret the PMI
The PMI expresses its data as an index based on 50. A reading less than 50 generally means manufacturing has slowed down in comparison to the previous period. A number larger than 50 suggests growth in manufacturing for the previous period. Forex traders look to the PMI to provide clues as to the future level of demand for goods from consumers in the near term. Essentially, the PMI is an indicator of inflation trends.
The Federal Reserve looks to PMI data from the ISM, as well as other inflation-related indicators in order to obtain a glimpse into the economic growth trajectory of the United States. These data, along with other economic reports and factors will determine the Federal Reserve’s outlook regarding future interest rate policy decisions. Given the importance of interest rate policies to currency markets, forex traders should watch the PMI closely when making choices in trading currencies.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.