The Institute for Supply Management surveys more than 375 firms from numerous sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade to compile their Non-Manufacturing Index. The non-manufacturing composite index has four equally weighted components: business activity (closely related to a production index), new orders, employment, and supplier deliveries (also known as vendor performance). The first three components are seasonally adjusted but the supplier deliveries index does not have statistically significant seasonality and is not adjusted.
For the composite index, a reading above 50 percent indicates that the non-manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining. The supplier deliveries component index requires extra explanation. A reading above 50 percent indicates slower deliveries and below 50 percent indicates faster deliveries. However, slower deliveries are a plus for the economy—indicating demand is up and vendors are not able to fill orders as quickly.
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 ISM manufacturing counterpart, partially due to its seasonally adjusted figures for several of its components.