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posted on 05 May 2015

April 2015 ISM Services Index Improved. Important Internals Improved More.

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved marginally from 56.5 to 57.8 (above 50 signals expansion). Important internals improved and remained in expansion. On the other hand, Market PMI Services Index was released this morning and declined.

This was within the range of market forecasts of 54.0 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:

PMI Services Index
Released On 5/5/2015 9:45:00 AM For Apr, 2015
Prior Consensus Consensus Range Actual
Level 59.2 57.7 57.5 to 59.1 57.4

With housing flat and manufacturing down, service is the bread-and-butter sector of the economy right now. The PMI services index held at a very strong 57.4 vs an even more impressive 59.2 in March. The sample's confidence in the long-term US economic outlook is strong as is hiring. Both costs and finished prices rose but from low levels. Still, these are still some of the first inflation signals of any report. Today's report underscores the strength of the domestic economy. The ISM non-manufacturing report, to be posted at 10:00 a.m. ET, has also been showing solid strength.

Recent History Of This Indicator
The PMI services index has been strong, underscoring the strength of the domestic economy. The mid-month flash for this report came in at 57.8 with expectations for the final reading at 57.7. The long-term average for this index is 55.9. Recent strength has been centered in new orders and also employment where gains have been robust.

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 declined 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 improved 4.1 points and now is at 61.6.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 1.4 and is currently at 59.2.

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 April for the 63rd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 57.8 percent in April, 1.3 percentage points higher than the March reading of 56.5 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased substantially to 61.6 percent, which is 4.1 percentage points higher than the March reading of 57.5 percent, reflecting growth for the 69th consecutive month at a faster rate. The New Orders Index registered 59.2 percent, 1.4 percentage points higher than the reading of 57.8 percent registered in March. The Employment Index increased 0.1 percentage point to 56.7 percent from the March reading of 56.6 percent and indicates growth for the 14th consecutive month. The Prices Index decreased 2.3 percentage points from the March reading of 52.4 percent to 50.1 percent, indicating prices increased in April for the second consecutive month, but at a slower rate. According to the NMI®, 14 non-manufacturing industries reported growth in April. The majority of respondents indicate that there has been an uptick in business activity due to the improved economic climate and prevailing stability in business conditions.


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

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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