Manufacturing gets the headlines, but services make up roughly 80% of U.S. GDP — if you're only watching the Manufacturing PMI, you're missing the report that actually tracks most of the economy.
Confusing the ISM Services PMI with the S&P Global Flash Services PMI is a common mistake — knowing the difference matters for which number to trust.
The sub-indexes below don't just describe this report — they're leading signals for GDP, inflation, and the jobs report too.
Manufacturing gets the headlines, but services make up roughly 80% of U.S. GDP — if you're only watching the Manufacturing PMI, you're missing the report that tracks most of the economy.
Why the Services PMI Tracks 80% of the U.S. Economy
Formerly called the Non-Manufacturing PMI, this monthly ISM survey measures the health of the U.S. service sector — banking, healthcare, retail, technology, real estate. Manufacturing gets the media attention, but the United States is overwhelmingly a service-based economy: services make up roughly 80% of total U.S. GDP.
The index has less history than its manufacturing counterpart (it only dates back to 1997) and services are generally less volatile than physical supply chains, which is partly why old-school traders sometimes underweight it. Modern professional traders watch it intensely anyway — it represents the vast majority of American jobs and output.
The Four Sub-Indexes Behind the Services PMI Headline Number
Unlike manufacturing's five components, the Services PMI surveys managers across 18 service sectors on four things, each weighted 25%:
- Business Activity — current output of services
- New Orders — the leading component for future business
- Employment — hiring or firing of staff
- Supplier Deliveries — how fast contractors fulfill needs
The ISM does not release a "Flash" PMI. If you see a Flash Services PMI on your economic calendar, it's published by S&P Global (formerly Markit) — a private data company releasing early estimates based on roughly 85% of survey responses. The ISM's own report, published a few days later, is the final, authoritative benchmark.
How to Read the Services PMI's Expansion/Contraction Threshold
Like its manufacturing counterpart, this is a diffusion index from 0 to 100. Above 50 signals expansion; a booming service sector can push the index toward 60. Below 50 signals contraction — and during genuine crises (2008, the 2020 lockdowns) the index has crashed into the low 40s or even 30s.
How the Services PMI Correlates With GDP and the S&P 500
Because services drive 80% of the economy, this index correlates heavily with overall GDP growth and with the earnings of the service-heavy companies that dominate the S&P 500. The Fed doesn't act on this report in isolation — it cross-references it against job market and inflation data. A crashing Services PMI tells the Fed that mass layoffs are likely imminent, giving it the concrete justification it needs to ease policy.
Why New Orders and Business Activity Lead the Rest of the Report
Of the four sub-indexes, New Orders and Business Activity carry the most forward-looking weight in practice, since they capture demand that hasn't fully worked its way into hiring or output yet. A soft Employment sub-index alongside strong New Orders often means firms are struggling to hire fast enough to keep up with demand — a "good problem" rather than a warning sign. The reverse combination (strong Employment, weak New Orders) is the more concerning pattern, since it suggests staffing levels haven't caught up with a demand slowdown yet.
Because this index alone is estimated to explain somewhere in the 60–80% range of near-term economic direction, professionals rarely trade off a single print — they wait for two or three consecutive readings in the same direction before treating it as a genuine trend rather than monthly noise.
What This Report Lets You Predict — Including the Inflation the Fed Fears Most
Like its manufacturing counterpart, the Services PMI is really three forecasts wearing one headline number. But because services dominate the economy, its signals carry more weight — and one of them matters more to the Fed than almost any other monthly data point.
| Sub-index | What it predicts | How to read it |
|---|---|---|
| New Orders & Business Activity | GDP | Demand across the 80% of the economy that actually drives growth. When these accelerate, GDP follows — and they turn before the quarterly release confirms it. |
| Prices Paid | Core CPI & Core PCE | The one to watch. Service costs are mostly wages and rent, which is exactly the "sticky" inflation the Fed can't dismiss as a temporary supply shock. |
| Employment | NFP | Services do most of the hiring in the U.S. economy, so this sub-index is a better NFP predictor than its manufacturing equivalent. |
Why Services Prices Paid Is the Most Underrated Number on the Calendar
Goods inflation is volatile and often self-correcting — a shipping bottleneck clears, a commodity spike fades, and prices normalise without the Fed lifting a finger. Services inflation doesn't work that way. Wages rarely fall, and rents reset slowly and stubbornly upward.
That's why the Fed watches core services inflation more closely than any headline figure. When this sub-index climbs, it's early evidence that inflation is embedding itself into the parts of the economy monetary policy has to fight hardest — and it appears here weeks before it shows up in Core CPI or Core PCE.
Services Prices Paid rising while the Employment sub-index stays strong is the setup that keeps rate cuts off the table — cost pressure with no labour-market weakness to offset it. Spot that pairing in this report and you have a read on the Fed's next meeting before the inflation and jobs data that will officially justify it has even been published.
This tells you direction, not the number. A hot Prices Paid reading doesn't tell you what CPI will print — it tells you which way the pressure is building.