National Association of Purchasing Managers
This release merits an A-
Source: National Association of Purchasing Managers.
Release Time: 10:00 ET on the first business day of the month for the
Raw Data Available At: http://www.napm.org.
The NAPM report is a national survey of purchasing managers which covers such
indicators as new orders, production, employment, inventories, delivery times,
prices, export orders, and import orders. Diffusion indices are produced for
each of these categories, with a reading over 50% indicating expansion relative
to the prior month, and a sub-50% reading indicating contraction.
The total index is calculated based on a weighted average of the following
five sub-indices, with weights in parentheses: new orders (30%), production
(25%), employment (20%), deliveries (15%), and inventories (10%).
The NAPM is one of the first comprehensive economic releases of the month,
typically preceding the employment report. Though it covers only the
manufacturing sector, it can often provide accurate hints regarding the tone of
subsequent releases. During periods of inflation concerns, the prices paid and
vendor deliveries indices often determine the bond market's reaction to the
The National Association of Purchasing Managers monthly Report on Business
is probably the most widely watched economic indicator produced by the private
sector. There are two key reasons for the NAPM's prominence. First, its
longevity - the report was first produced in 1931, and after a break during
World War II, it has produced continuously since 1948. Second , its leading
quality - the NAPM has been one of the better predictors of the business cycle
over the years.
Who and What It Surveys
The NAPM index is the result of a monthly survey of over 300 companies in 20
industries throughout the 50 states. The survey queries respondents on a number
of monthly indicators, including orders, production, employment, inventories,
delivery times, prices paid, export orders, and import orders. Respondents are
asked to characterize each indicator as higher, lower, or unchanged for the
month (or faster/slower in the case of delivery times). They are not asked for
specific numbers - only a thumbs up or down.
Presenting the Numbers
Based on these responses, the NAPM calculates diffusion indices for each of
the components. These diffusion indices are calculated by adding the percentage
of respondents answering "unchanged" to half of the percentage answering
"higher" (or "slower" for deliveries). These diffusion indices do not yield
estimates of specific magnitudes of strength or weakness, but the more
respondents who are indicating trends in the same direction - the better the
chance that the magnitude of that move is larger.
A diffusion index of 50% is the theoretical breakeven mark - with readings
above indicating strength and below indicating weakness. The NAPM only provides
the raw data - the Department of Commerce produces the seasonal factors which
are used to provide more meaningful, seasonally adjusted indices.
The total index is not the result of a separate question regarding general
business conditions (as is the case with the Philadelphia Fed index). Instead,
the index is calculated using the weighted sum of five of the subindices. Orders
account for 30% of the total; production - 25%; employment - 20%; deliveries -
15%; inventories - 10%. Prices, export orders, and import orders are not part of
the total index.
Breakevens in Theory and Practice
Though 50% is the breakeven mark in theory, different readings have proved to
be breakeven in practice. For new orders, 50.3% is the level consistent with
breakeven readings in factory orders. For production, 49.4% has been the
breakeven mark in theory and practice. For employment, 47.5% has been consistent
with a steady level of manufacturing employment. For inventories, 41.3% has been
consistent with steady business inventory readings. And finally, the 42.7% mark
on the total index marks the point below which the overall economy is believed
to be in recession. Between 42.7-50%, the manufacturing sector may be in
decline, but the total economy is only seeing slower growth.
This observation highlights the important element which is missing from the
NAPM index - the service sector. With the manufacturing sector making up an
ever-shrinking percentage of the total economy - the NAPM might seem to be an
indicator in decline. Not so, however - the manufacturing sector, while
shrinking in relative terms, still tends to lead the total economy into and out
of recessions. The NAPM therefore remains a closely watched indicator despite
its manufacturing focus.
A Proven Performer
The NAPM's leading quality has been proven over time. Its bottom during a
recession has preceded the turning point for the business cycle by an average of
four months, and its worst performance in leading the turning point was on two
occasions when the NAPM trough occurred in the same month as the business cycle
trough. The NAPM index is released on the first business day of each at 10:00
ET, with data for the prior calendar month.