What it means
Where the manufacturing survey looks at factories, this one looks at the much larger world of services, covering industries such as retail, finance, healthcare, construction, hospitality and professional services. Respondents say whether activity in their own business is higher, the same or lower than the month before.
Because services employ most workers and generate most output, the survey is a useful barometer of the wider economy. Each question is turned into a diffusion index, which measures how widely a change is spread among the respondents rather than how large the change is.
The score is the percentage reporting an increase plus half the percentage reporting no change. A score of 50 therefore means the firms reporting increases and decreases are evenly balanced.
The headline figure is the simple average of four sub-indices: business activity, new orders, employment and supplier deliveries. As in the manufacturing survey, slower supplier deliveries count as a positive because they usually signal strong demand.
Other indices, such as prices paid and inventories, are published alongside the headline but are not part of it. The report is released a few business days into each month, after the manufacturing report.
Economists, bond traders and central bank watchers follow it because it helps them judge whether the economy is slowing or accelerating before the official statistics arrive. Business leaders can use it as a sense-check.
A rising new orders index suggests customers across the service sector are committing to more work, which may help a software or consulting firm plan hiring. A jump in the prices paid index may warn that cost pressure is building.
The name has changed over time, which can cause confusion when reading older research. Older reports and textbooks call it the Non-Manufacturing Index, while newer material refers to the Services PMI, and both describe the same survey series.
As with any survey, it measures opinion and direction rather than exact output.
In practice
Real-world examples.
Example
A regional accounting firm sees the services index climb above 50 for several months. The managing partner takes it as a sign that clients are healthy and approves two extra hires. She keeps an eye on the new orders sub-index as an early warning.
Example
A commercial property investor reads that the employment sub-index has fallen below 50. He concludes that service businesses are slowing their hiring, which could reduce demand for office space. He asks his analyst to compare the survey with local vacancy data before changing any plans.
Example
A currency trader notes that a surprise jump in the headline index lifts expectations of higher interest rates. He compares the result with the previous month, the consensus forecast and the manufacturing report before placing any trade.
Formula
Calculation
Sub-index = % reporting higher + (0.5 x % reporting the same)
Headline index = (business activity + new orders + employment + supplier deliveries) / 4
Suppose 50% of respondents report higher business activity, 30% report the same and 20% report lower. Business activity = 50 + (0.5 x 30) = 65. Assume new orders come out at 58, employment at 50 and supplier deliveries at 51. Headline = (65 + 58 + 50 + 51) / 4 = 224 / 4 = 56. Because 56 is above 50, the survey signals expansion in the service sector.Case study
Seen in the real world.
Brightfield Hospitality Group is an illustrative, fictional chain of mid-sized hotels and restaurants. The finance director was preparing next year's budget and wanted a view on whether service spending was likely to hold up.
She tracked the services survey over six months and noticed that the headline stayed above 50, but the new orders index was drifting down towards the line. She did not treat it as a forecast. She tested the group's own booking data, which showed advance bookings softening in the same way.
The group trimmed its hiring plan by a small amount and held back one renovation until demand was clearer. The illustrative lesson is that a national survey is best used as a prompt to check your own numbers, not as a substitute for them.
Watch out
Common mistakes.
- Reading a value of 50 as strong growth, when it is the dividing line between expansion and contraction.
- Assuming the survey measures output in dollars, when it measures how widely firms report improvement.
- Confusing it with the manufacturing survey, when the two cover different sectors and use different sub-indices.
Questions
People also ask.
Is the ISM Non-Manufacturing report the same as the Services PMI?
Yes, the series was renamed, so older material uses the Non-Manufacturing label and newer material uses Services PMI.
Which sub-indices make up the headline?
Business activity, new orders, employment and supplier deliveries are averaged to form it.
How often is it published?
It is published monthly, a few business days into the month, covering the previous month.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related