Diffusion indexes

July 9, 2012 § 1 Comment

purchasing managers index

Diffusion indexes confuse the heck out of people the first time they see one. But once diffusion indexes become familiar, they make a whole lot of sense. To chart a diffusion index and label it properly, you really need to understand what the numbers mean. (Okay, that goes for any graphic, but don’t expect to wing it with a diffusion index.)

With a diffusion index, 50 is the baseline, anything above that indicates expansion, anything below that indicates contraction. What confuses people is this: If the number is 60 in one month and 55 the next, that does not indicate contraction, it indicates slower expansion. If the number is 40 one month and 45 the next, that does not indicate expansion, it indicates slower contraction.

Take a look at the four examples of diffusion indexes in this post. I believe they were all made by Pat Minczeski on The Wall Street Journal graphics team. You will see that The Wall Street Journal took great pains to label not just whether a figure indicates expansion or contraction, but whether it is slower or faster than the previous month.

purchasing managers index

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Usually when you chart a diffusion index, you are looking at some form of purchasing managers index of manufacturing activity. The Institute for Supply Management and Markit provide much of this data. To create an index, ISM surveys purchasing managers and asks them whether they’re doing more, less, or the same of things like placing new orders, hiring people or producing goods. The manufacturing index (or its sub-indexes) reflects their responses.

Here is a link to the most recent ISM report: http://www.ism.ws/ISMReport/content.cfm?ItemNumber=10748&navItemNumber=12949

And here are the historical numbers for the main manufacturing index: http://www.ism.ws/ISMReport/content.cfm?ItemNumber=10752

For detailed historical figures, you probably need to contact the Institute for Supply Management or Markit. I haven’t found detailed figures on their sites. Give me a shout if you come across them.

 

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