A: A diffusion index measures the degree to which a change in something is dispersed, spread out, or "diffused" in a particular group. If all members of a group of people (sample population) are asked if something has changed and in which direction, they will answer in one of three ways: it has not changed, it has increased, or it has decreased. This is the nature of the ROB questions.
All the ISM indexes are "diffusion indexes" and are indicators of month-to-month change. The percent response to the "Better," "Same," or "Worse" question is difficult to compare to prior periods; therefore, we diffuse the percentages for this purpose. A diffusion index indicates the degree to which the indicated change is dispersed or diffused throughout the sample population. Respondents to ISM surveys indicate each month whether particular activities (e.g., new orders) for their organizations have increased, decreased, or remained unchanged from the previous month. The ISM indexes are calculated by taking the percentage of respondents that report that the activity has increased ("Better") and adding it to one-half of the percentage that report the activity has not changed ("Same") and adding the two percentages. Using half of the "Same" percentage effectively measures the bias toward a positive (above 50 percent) or negative index. As an example of calculating a diffusion index, if the response is 20 percent "Better," 70 percent "Same," and 10 percent "Worse," the Diffusion Index would be 55 percent (20% + [0.50 x 70%]). A reading of 50 percent indicates "no change" from the previous month.
Economists and statisticians have determined that the farther the index is away from the amount that would indicate "no change" (50 percent), the rate of change is greater. Therefore, an index of 60% indicates a faster rate of increase than an index of 55% (increased activity is becoming more dispersed), and an index of 35% indicates a faster rate of decrease than an index of 40% (decreased activity is becoming more dispersed). A value of 100 indicates all respondents are reporting increased activity while 0 indicates that all respondents report decreased activity.