The Service PMI Index, also known as the Services Purchasing Managers’ Index or the ISM Non-Manufacturing Index, is a monthly economic indicator that measures the activity and performance of the service sector in a country. The service sector includes industries such as finance, insurance, real estate, retail, hospitality, education, health care, and entertainment.
The Service PMI Index is based on a survey of purchasing managers and supply executives from hundreds of service companies across various industries. The survey asks them to report on various aspects of their business, such as new orders, output, employment, inventories, prices, and supplier deliveries. The survey results are then compiled into a diffusion index, which ranges from 0 to 100. A reading above 50 indicates that the service sector is expanding, while a reading below 50 indicates that it is contracting. A reading of 50 means that there is no change in the service sector activity.
The Service PMI Index is published by the Institute for Supply Management (ISM) in the US, and by IHS Markit in other countries. The index is usually released on the first week of each month, and provides a timely and reliable snapshot of the current and future business conditions in the service sector. The index is widely followed by economists, analysts, investors, and policymakers, as it can offer valuable insights into the economic trends, growth prospects, inflation pressures, and consumer demand in a country.
The Service PMI Index can also have a significant impact on the stock market, as it can influence the expectations, sentiments, and decisions of market participants. Some of the ways that the Service PMI Index can affect the stock market are:
- The Service PMI Index can indicate the overall health and direction of the economy, as the service sector accounts for a large share of the gross domestic product (GDP) and employment in most countries. A high or rising Service PMI Index can signal a strong or improving economy, which can boost the confidence and optimism of investors and consumers, and support the earnings and valuations of companies. A low or falling Service PMI Index can signal a weak or deteriorating economy, which can dampen the mood and outlook of investors and consumers, and hurt the profitability and attractiveness of companies.
- The Service PMI Index can reflect the demand and supply conditions in the service sector, which can affect the pricing power and margins of service companies. A high or rising Service PMI Index can indicate a high or increasing demand for services, which can enable service companies to raise their prices and improve their margins. A low or falling Service PMI Index can indicate a low or decreasing demand for services, which can force service companies to lower their prices and squeeze their margins.
- The Service PMI Index can reveal the trends and opportunities in different service industries, which can help investors to identify and select the best-performing or most-promising sectors and stocks. A high or rising Service PMI Index in a specific industry can indicate a high or growing demand, output, and profitability in that industry, which can benefit the companies operating in that industry. A low or falling Service PMI Index in a specific industry can indicate a low or shrinking demand, output, and profitability in that industry, which can harm the companies operating in that industry.
Examples of the Service PMI Index
To illustrate the concept of the Service PMI Index, let us look at some examples of how to interpret and use it.
Example 1:
The ISM Non-Manufacturing Index for the US was 61.9 in September 2023, up from 60.3 in August 2023. This was the highest reading since October 2018, and indicated a strong and accelerating expansion of the service sector in the US. The index was driven by a surge in new orders, business activity, and employment, while the prices and supplier deliveries indexes moderated slightly. The index also showed that all 18 service industries reported growth in September, with the strongest expansions in arts, entertainment, and recreation; accommodation and food services; and transportation and warehousing
This report suggested that the US economy was recovering robustly from the pandemic-induced slowdown, and that the service sector was leading the growth momentum. The report also implied that the service sector was facing strong demand and supply pressures, which could result in higher inflation and wages. The report could have a positive impact on the US stock market, as it could boost the confidence and optimism of investors and consumers, and support the earnings and valuations of service companies, especially those in the leisure, hospitality, and transportation sectors.
Example 2:
The IHS Markit India Services PMI was 54.4 in September 2023, down from 56.7 in August 2023. This was the lowest reading since May 2023, and indicated a moderate and decelerating expansion of the service sector in India. The index was weighed down by a slowdown in new orders, output, and employment, while the prices and supplier deliveries indexes rose sharply. The index also showed that 11 out of the 15 service industries reported growth in September, with the strongest expansions in finance and insurance; information and communication; and real estate and business services
This report suggested that the Indian economy was losing some steam amid the resurgence of Covid-19 cases and the tightening of lockdown measures in some states. The report also implied that the service sector was facing high cost pressures and supply chain disruptions, which could erode the profitability and competitiveness of service companies. The report could have a negative impact on the Indian stock market, as it could dampen the mood and outlook of investors and consumers, and hurt the attractiveness and performance of service companies, especially those in the consumer-facing and travel-related sectors.