NAPM: National Association of Purchasing Managers

Importance (A-F): 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 prior month.
Raw Data Available At: http://www.napm.org.

In Brief
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 report.

In Depth
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.

No Services
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.