What is ISM Non-Manufacturing Index

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

BREAKING DOWN ISM Non-Manufacturing Index

The ISM Non-Manufacturing Index measures employment trends, prices and new orders in non-manufacturing 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.

By monitoring the ISM Non-Manufacturing Index, investors are able to better understand national economic conditions. When this index is increasing, investors can 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, because of 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 very 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.