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posted on 04 March 2015

February 2015 ISM Services Index Declines Marginally But Remains in Expansion

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved marginally from 56.7 to 56.9 (above 50 signals expansion). Important internals weakened but still remained in expansion

This was within the range of market forecasts of 55.5 to 57.5 (consensus 56.5).

For comparison, the Market PMI Services Index was released this morning also - and it strengthened instead of weakening. Here is the analysis from Bloomberg:

Released On 3/4/2015 9:45:00 AM For Feb, 2015
Prior Consensus Consensus Range Actual
Level 54.2 56.8 54.0 to 57.0 57.1

Recent History Of This Indicator
The Markit PMI services flash index for February rose to a 4-month high of 57.0. This compares with 54.2 in final January at 54.0 in the January flash. Hiring was up for month in the sample as were backlogs.

There are two sub-indexes in the NMI which have good correlations to the economy - the Business Activity Index and the New Orders Index - and both have good track records in spotting an incipient recession. The Business Activity Index improved and the New Orders Index marginally improved - with both remaining in territories associated with moderate expansion.

This index and its associated sub-indices are fairly volatile - and one needs to step back from the data and view this index over longer periods than a single month.

The Business Activity sub-index declined 2.1 points and now is at 59.4.

ISM Services - Business Activity Sub-Index

The New Orders Index declined 2.8 and is currently at 56.7.

ISM Services - New Orders Sub-Index

The complete ISM manufacturing and non-manufacturing survey table is below.

Econintersect does give serious consideration to this survey as the service sector accounts for 80% of the economy and 90% of employment. However, this an opinion survey and is not hard data.

From the ISM report:

Economic activity in the non-manufacturing sector grew in February for the 61st consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business.

The NMI registered 56.9 percent in February, 0.2 percentage point higher than the January reading of 56.7 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 59.4 percent, which is 2.1 percentage points lower than the January reading of 61.5 percent, reflecting growth for the 67th consecutive month at a slower rate. The New Orders Index registered 56.7 percent, 2.8 percentage points lower than the reading of 59.5 percent registered in January. The Employment Index increased 4.8 percentage points to 56.4 percent from the January reading of 51.6 percent and indicates growth for the 12th consecutive month. The Prices Index increased 4.2 percentage points from the January reading of 45.5 percent to 49.7 percent, indicating prices contracted in February for the third consecutive month. According to the NMI, 14 non-manufacturing industries reported growth in February. Comments from respondents have increased in regards to the affects of the reduction in fuel costs and the impact of the West Coast port labor issues on the continuity of supply. Overall, supply managers feel mostly positive about the direction of the economy.


The 14 non-manufacturing industries reporting growth in February - listed in order - are: Accommodation & Food Services; Wholesale Trade; Real Estate, Rental & Leasing; Transportation & Warehousing; Agriculture, Forestry, Fishing & Hunting; Utilities; Management of Companies & Support Services; Finance & Insurance; Public Administration; Educational Services; Retail Trade; Professional, Scientific & Technical Services; Health Care & Social Assistance; and Information. The four industries reporting contraction in February are: Mining; Construction; Other Services; and Arts, Entertainment & Recreation.

Caveats on the use of ISM Non-Manufacturing Index:

This is a survey, a quantification of opinion. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy for as long as it has been in existence. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions.

The main ISM non-manufacturing index (NMI) is so new that it does not have enough data history to have reliable certainty about how it correlates to the economy. Again, two sub-indices (business activity and new orders) do have good correlation for the limited history available.

No survey is accurate in projecting employment - and the ISM Non-Manufacturing Employment Index is no exception. Although there are some general correlation in trends if you stand far enough back from this graph, month-to-month movements have not correlated well with the BLS Service Sector Employment data.

ISM Services Employment Sub-Index vs BLS Non-Farm Services Employment

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