How Is It Computed?
The methodology for the non-manufacturing business activity index is much the same as that used in the manufacturing survey. Questionnaires are sent to more than 370 purchasing managers in over 17 industries, including legal services, entertainment, real estate, communications, insurance, transportation, banking, and lodging. The proportion of companies queried in each industry depends on how much that sector contributes to GDP.
Respondents are asked if they are experiencing higher activity, lower activity, or no change for each of the ten components listed here:
- Business activity: Measures changes in the level of business activity in services.
- New orders: Reflects shifts in the number of new orders from customers.
- Employment: Looks at the rate of increase or decrease in employment.
- Supplier deliveries: Tells whether deliveries from suppliers are faster or slower.
- Inventories: Monitors the increase or decrease in inventory levels.
- Customer inventories: Rates the level of inventories their clients have.
- Prices: Reports whether member organizations are paying more or less for products and services
- Backlog of orders: Measures the amount of backlog of orders, whether growing or declining.
- New export orders: Reports changes in the level of orders, requests for services, and other activities to be provided outside the U.S.
- Imports: Measures the rate of change in materials and services imported.
The index is computed by giving equal 25% weight to the top four components (business activity, new orders, employment, and supplier deliveries). Seasonal adjustments are made for only four of the ten: business activity, new orders, employment, and prices.
For the main Business Activity index, a reading of 50 shows that the same percentage of purchasing managers reported higher activity as lower activity. Index values over 50 indicate growth, whereas below 50 means contraction. Since its inception in 1998, the ISM non-manufacturing Business Activity index has rarely dropped below 50.”
Excerpt From: Bernard Baumohl. “The Secrets of Economic Indicators: Hidden Clues to Future Economic Trends and Investment Opportunities, 3/e.” iBooks. https://itunes.apple.com/us/book/secrets-economic-indicators-hidden-clues-to-future/id547218470?mt=11