ISM Services Index
The ISM Services Index is a monthly survey-based gauge published by the Institute for Supply Management that measures business activity across the U.S. service sector, covering industries from finance and healthcare to retail and hospitality.
The Institute for Supply Management releases the Services ISM Report on Business on the third business day of each month, covering the prior month. It surveys purchasing and supply executives at more than 400 service-sector firms, asking about business activity, new orders, employment, supplier deliveries, and prices. Respondents indicate whether each component is expanding, contracting, or unchanged. The headline figure — the Services PMI, or Purchasing Managers Index — is calculated so that a reading above 50 indicates expansion and below 50 indicates contraction.
The services sector is critical to understanding the U.S. economy because it accounts for roughly 77% of private-sector output and employment. Activities covered include professional and business services, healthcare, finance and insurance, retail trade, accommodation and food services, information technology, and utilities. Because services generally cannot be stored in inventory, the data reflects real-time demand conditions far more directly than manufacturing surveys.
The business activity sub-index closely mirrors the manufacturing PMI's production component and tracks closely with GDP growth in the services sector. The new orders sub-index is considered a leading indicator of near-term revenue trends. The employment sub-index feeds into expectations for the monthly nonfarm payrolls report from the Bureau of Labor Statistics (BLS). The prices paid sub-index is monitored by the Federal Reserve as a supplemental inflation signal.
Market participants watch the ISM Services Index closely because a surprise in either direction can shift expectations for Fed policy. A strong services expansion combined with elevated prices-paid tends to reinforce expectations of tighter monetary policy. A contractionary reading can raise recession concerns, especially when it coincides with weakness in manufacturing.
Since the 2008 financial crisis, services sector resilience has often kept the overall economy growing even when manufacturing contracted, making this index an essential tool for separating cyclical softness in goods production from broader economic deterioration.