ISM Non-Manufacturing Index

What Is the ISM Non-Manufacturing Index?

The ISM Non-Manufacturing Index is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives. The ISM services survey is part of the ISM Report On Business — Manufacturing (PMI) and Services (PMI). The Purchasing Managers' Index (PMI) is a barometer on the overall economy by showing the economic trends in both the manufacturing and service sectors. The ISM Report On Business provides guidance to supply management professionals, business leaders, economists, and government officials by monitoring the economic conditions of the nation.

The ISM Services PMI (formerly the Non-Manufacturing NMI) is compiled and issued by the Institute of Supply Management (ISM) and contains a diffusion index based on survey data. Conversely, the Manufacturing PMI report (formerly the ISM Manufacturing Index) surveys manufacturers to determine the level of output and economic activity in production facilities as well as the commodity purchases and inventory that are used to produce those goods.

Understanding the ISM Non-Manufacturing Index

The Institute for Supply Management is a not-for-profit organization with over 50,000 members across 100 countries. The ISM helps to establish education, research, leadership development, and certification in various areas regarding the profession of supply management and purchasing. The purchasing managers' index was developed in coordination with the U.S. Department of Commerce to measure various activities within supply management. The ISM Services report contains the economic activity of more than 15 industries.

Some of those sectors include:

The ISM Services PMI comes out in the first week of each month and provides a detailed view of the U.S. economy from a non-manufacturing standpoint. Data in the index is not very volatile. Trends can go on for months, which is valuable for analysts who focus on making long-term economic forecasts.

Components of the ISM Services Report

The ISM report has several components that measure business growth or contraction, as well as many other factors that go into the supply management process. Below are a few of the key areas that are covered within the report.

Business Activity

The services PMI report provides an overall outlook for business activity in the United States. The PMI index is reported as a number — above 50 represents growth or expansion while below 50 represents a contraction. The report also shows the industries that experienced growth in business activity compared to the prior month while showing which industries contracted.

New Orders

New orders include new sales that were recorded for the month and whether businesses have seen increases or decreases in demand for their services versus prior months. For example, retailers might report a high demand for their services at year-end due to the holiday season. New orders help provide insight as to the demand for services by consumers and businesses and, ultimately, whether economic growth is increasing or decreasing.

Employment Trends

Employment activity in the services sector is measured on a monthly basis. The report shows whether employment grew or contracted each month. The employment figures are compared and contrasted to previous months. However, the report also provides insight as to the level of tightness in the labor market, meaning whether or not supply managers were able to fill vacant positions with qualified applicants. If there are more jobs than applicants, it can indicate a healthy, growing economy. Conversely, if there are more workers looking for work than open positions, it can indicate that economic growth is slowing and unemployment may increase.

Inventories

Inventory levels are tracked each month to show whether there's a reported increase or decrease. For example, if a company experienced no sales growth, its inventory levels might have remained the same due to a lack of demand. 

The overall trend in inventory levels, and whether they're increasing or decreasing, can help provide insight as to the level of demand for the services within specific industries. If demand is high, leading to lower inventory levels, it can be a leading economic indicator as to the health of consumer spending in the economy. Increased levels of consumer spending typically lead to higher economic growth.

The ISM Services report also shows which service industries reported an increase in prices paid for various raw materials and goods. The price paid could also include services that companies needed, such as software services. The prices paid for services and goods by companies can be an indicator of inflation, which is a measure of how much prices increase in an economy. If businesses are paying higher prices, it's likely inflation is occurring. Higher prices could also be an indicator of a shortage in supply for particular goods.

Special Considerations

Monitoring the ISM Services PMI can help investors better understand the economic conditions within the U.S. Also, some service sectors may experience growth while others contract, which can be helpful when choosing which industry to invest in via equities or corporate bonds. The ISM Services PMI provides significant information about factors affecting total output, growth, and inflation.

When the business activity index is increasing, investors might infer that the stock markets should increase because of higher expected corporate profits. When used alongside the ISM Manufacturing PMI, the industry coverage between the two reports account for a significant portion of the goods and services produced in the U.S. economy — measured by gross domestic product (GDP).