ISM Services Index

What Is the ISM Services Index?

The ISM Services Index (formerly the Non-Manufacturing Index) is a monthly survey-based indicator from the Institute for Supply Management that measures business conditions in the U.S. service sector. Published on the third business day of each month (two days after the Manufacturing PMI), it uses the same diffusion index methodology with 50 as the expansion/contraction threshold.

The composite index is calculated from four equally weighted sub-indices: business activity, new orders, employment, and supplier deliveries. Additional sub-indices for prices paid, inventories, and other categories provide supplementary detail.

Why It Matters for Markets

The service sector represents roughly 80% of U.S. GDP, making the ISM Services Index arguably more important than the manufacturing PMI for assessing overall economic conditions. During the 2022-2023 period, when manufacturing was in contraction territory, the resilience of the services sector (reflected in the ISM Services Index remaining above 50) was the primary reason the economy avoided recession.

The business activity sub-index is the closest analogue to the manufacturing production index and is the most directly comparable to economic output. The new orders component provides a forward-looking signal for service sector growth. The prices paid component has become increasingly important for inflation analysis, as services inflation has proven stickier and more persistent than goods inflation.

For traders, the ISM Services release is a significant market event, though typically slightly less impactful than the manufacturing PMI due to its later release date. Large surprises relative to expectations can move bond yields, equity markets, and currencies, particularly when they affect the inflation or employment narrative.

Services Sector Dynamics

The service sector encompasses an enormous range of activities with different cyclical characteristics. Healthcare and education are relatively recession-resistant. Finance and professional services are sensitive to the business cycle and market conditions. Hospitality, travel, and entertainment are highly cyclical and were devastated by the pandemic.

Analyzing the ISM Services survey alongside the ISM Manufacturing survey provides a comprehensive view of the economy. When both are expanding, the economy is on solid footing. When manufacturing is weak but services are strong, the economy can muddle through. When both are contracting, recession risk is elevated. This two-index framework is one of the simplest and most effective tools for real-time business cycle assessment.