A few weeks ago, we discussed the importance of the ISM Manufacturing Index, so for this week's edition of Macro Mondays, let's talk about the opposite of that: the ISM Non-Manufacturing Index. The name alone suggests that it covers all industry outside of manufacturing and development, in other words, the service sector. Most American workers are exposed to service jobs in some capacity on a daily basis -- bus drivers, phone operators, restaurant servers, painters, singers, movie theater attendants, nurses, house cleaners, teachers...you get the idea.
With the help of Investopedia and Bloomberg, here are the details of the ISM Non-Manufacturing Index and why it should be an important consideration in your investing life:
What is the 'ISM Non-Manufacturing Index'?
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.
What exactly does it do?
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 should investors care?
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data like the ISM non-manufacturing survey's composite index, investors will know what the economic backdrop is for the various markets. The non-manufacturing composite index has four equally weighted components: business activity, new orders, employment, and supplier deliveries. The ISM did not begin publishing the composite index until the release for January 2008. Prior to 2008, markets focused on the business activity index. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. While the ISM manufacturing index has a long history that dates to the 1940s, this relatively new report goes back to 1997.
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