ISM Services PMI (ISM Svc)

The ISM Services PMI is arguably more important than its manufacturing counterpart for understanding the state of the U.S. economy. Services account for approximately 70% of U.S. GDP — healthcare, finance, restaurants, hotels, logistics, professional services — and the ISM Services survey captures sentiment across all of them. Released on the third business day of every month at 10:00 AM ET, it often sets the week's tone for equity markets.

Like the manufacturing index, readings above 50 indicate expansion and below 50 indicate contraction in the services sector. But unlike the manufacturing PMI — which contracted for much of 2022–2024 without triggering a recession — the ISM Services PMI staying above 50 is what kept the U.S. economy out of recession during the most aggressive Fed tightening cycle in 40 years.

The sub-indices traders focus on most are: business activity (the broadest measure of output), new orders (the leading indicator), employment (a preview for the services component of NFP), and prices paid (an inflation signal that often leads PCE). The prices paid component has been a persistent headache for inflation doves — elevated services inflation is notoriously sticky because it reflects wages, and wages don't fall easily.

For portfolio positioning, a strong ISM Services print tends to support financial stocks (XLF), consumer discretionary (XLY), and broad market indices. A collapse in ISM Services is a genuine recession warning because it signals the sector driving 70% of economic output is contracting — an outcome the Fed will always prioritize halting over its inflation goals.