Introduction
The U.S. Non-Manufacturing Index (NMI), published monthly by the Institute for Supply Management (ISM), serves as a crucial economic indicator measuring business activity levels in America's non-manufacturing sectors. Widely regarded as a key barometer of economic health, the NMI reflects expansion or contraction trends in service-oriented industries and construction—sectors that dominate the U.S. economy. Its fluctuations significantly impact overall economic growth, employment markets, inflation, and monetary policy decisions.
Definition and Composition of NMI
The NMI represents a composite index weighted from four primary components:
1. Business Activity/Production
This highest-weighted component gauges monthly production or service delivery levels, directly reflecting output in non-manufacturing sectors and serving as a key measure of economic growth velocity.
2. New Orders
Tracking received orders, this forward-looking indicator signals potential future production expansions when increasing.
3. Employment
Measuring workforce changes, employment growth suggests business optimism about economic prospects and willingness to invest in labor.
4. Supplier Deliveries
This metric assesses raw material/service delivery speeds, where slowdowns may indicate demand surges or supply chain constraints.
Supplementary Indicators: The NMI report also includes price movements, inventory levels, order backlogs, export orders, and import volumes—each providing additional economic insights.
Calculation Methodology
The NMI derives from weighted averages (Business Activity/Production: 30%; New Orders: 30%; Employment: 20%; Supplier Deliveries: 20%) of diffusion indices calculated from ISM's surveys of purchasing managers. Respondents characterize monthly changes as "increasing," "unchanged," or "decreasing," converted to a 0-100 scale where values above 50 indicate expansion.
Interpretation and Applications
Key interpretive benchmarks:
- NMI > 50: Non-manufacturing expansion, suggesting economic growth
- NMI < 50: Sector contraction, potentially signaling recession
- NMI = 50: Economic stability
Trend analysis proves equally vital—sustained increases denote accelerating growth, while persistent declines suggest deceleration. The NMI serves multiple analytical purposes:
- GDP Forecasting: Exhibits positive correlation with economic growth
- Labor Market Assessment: Employment subindex reflects sector hiring
- Inflation Monitoring: Price subindex reveals cost pressures
- Investment Strategy: Informs market participants about economic conditions
- Monetary Policy: Guides central bank decision-making
Historical Performance and Influencing Factors
The NMI's historical fluctuations mirror U.S. economic cycles—typically exceeding 50 during expansions and dipping below during contractions. Key influencers include:
- Macroeconomic conditions (interest rates, inflation, fiscal policy)
- Consumer confidence levels
- Business investment patterns
- Global economic dynamics
- Industry-specific variables
Comparative Analysis with Other Indicators
While essential, the NMI represents one component of comprehensive economic analysis. Other critical metrics include:
- Manufacturing PMI: ISM's manufacturing counterpart
- GDP: Comprehensive output measurement
- Employment Reports: Labor market statistics
- Price Indices (CPI/PPI): Inflation tracking
July 2023 ISM Report Analysis
The latest data revealed a 53.7 NMI reading—1.4 points below June's 55.1, marking the lowest level since August 2016. While remaining expansionary, this deceleration warrants examination.
Sector Performance
Thirteen industries reported growth, led by accommodation/food services, utilities, and professional services. Conversely, five sectors—including retail trade and education services—experienced declines, reflecting economic complexity.
Component Breakdown
- Business Activity: Fell 5.1% to 53.1 (120-month expansion streak)
- New Orders: Declined 1.7% to 54.1 (120-month expansion)
- Employment: Rose 1.2% to 56.2 (65-month expansion)
- Prices: Dropped 2.4% to 56.5 (26-month increase)
Expert Insight: ISM's Tony Nieves attributed the cooling to global economic conditions while noting positive employment trends. He emphasized trade tensions as the primary growth inhibitor, with September data proving crucial for Q4 projections.
Conclusion
The July 2023 NMI indicates moderated non-manufacturing growth amid trade-related uncertainties. However, resilient employment and consumer confidence continue supporting economic fundamentals. Future monitoring should focus on labor markets, consumption patterns, and trade policy developments to navigate evolving conditions.