What Is the ISM Non-Manufacturing Index?

The ISM Non-Manufacturing Index (NMI) is an economic index based on surveys of more than 400 non-manufacturing (or services) firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.

This index can be compared with the ISM Manufacturing Index, which surveys manufacturers.

Key Takeaways

  • The ISM Non-Manufacturing Index monitors changes in production levels from month to month for non-manufacturing firms, and is an important economic indicator.
  • Traders watch the index for signals of economic growth and corporate profits.
  • A number above 50 indicates a growing non-manufacturing (or services) sector.

Understanding the ISM Non-Manufacturing Index

The ISM Non-Manufacturing Index (NMI) measures employment trends, prices and new orders in non-manufacturing (or services) industries. Even though non-manufacturing sectors account for a majority of the economy, the ISM Non-Manufacturing Index has less of a market impact because its data tends to be more cyclical and predictable. Nevertheless, the index is valuable for providing insights into the business conditions in non-manufacturing industries, which can have an effect on output and inflationary pressures. The NMI index is reported as a number—above 50 represents growth or expansion, and below 50, contraction.

By monitoring the ISM Non-Manufacturing Index, investors are able to better understand national economic conditions. When this index is increasing, investors may assume that the stock markets should increase because of higher corporate profits. The opposite can be thought of the bond markets, which may decrease as the ISM Non-Manufacturing Index increases because of sensitivity to potential inflation.

The ISM Non-Manufacturing Index gets more attention than its manufacturing counterpart, partially due to its seasonally adjusted figures for several of its components.

Why the ISM Non-Manufacturing Index Is Important

The ISM Non-Manufacturing Index comes out on the first week of each month. It is a relatively new indicator, but it is gaining more attention and relevance with every release due to its broad coverage. It 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.

The index is also valuable to investors, who are able to get a more detailed look at all the factors contributing to current economic conditions. Though low in market impact, the ISM Non-Manufacturing Index provides significant information about factors that affect total output growth and inflation. When used alongside the ISM Manufacturing Report, the industry coverage between the two reports accounts for almost 90 percent of the GDP. ISM also releases the Non-Manufacturing Prices report, which is a focused indicator of inflation.

The ISM non-manufacturing sub-indices, such as business activity, provide investors insights into the economic health for a variety of market sectors. The stock market, for example, prefers healthy economic growth as it translates to higher corporate profits. On the other hand, bond markets favor less rapid growth and are extremely sensitive to inflationary pressure.