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posted on 03 June 2015

May 2015 ISM Services Index Declined and Came In Under Expectations

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined from 57.8 to 55.7 (above 50 signals expansion). Important internals also declined but remained in expansion. Market PMI Services Index was released this morning and also is in expansion but declined.

This was on the low side of the range of market forecasts of 55.5 to 58.2 (consensus 57.2).

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 6/3/2015 9:45:00 AM For May, 2015
Prior Consensus Consensus Range Actual
Level 57.4 56.5 56.3 to 58.0 56.2

Markit's U.S. service-sector sample continues to report very solid rates of growth though at a little slower pace, at 56.2 vs Econoday expectations for 56.5. The flash reading for May was 56.4 with the final April reading at 57.4.

Rates of new orders and business activity are both solid but, like the headline index, a little slower than previous readings. Backlog orders are up but at the weakest rate since July.

Big positives in the report include the best strength in the 12-month outlook since November. This in turn is reflected in the 5th straight gain for current employment which is as strong as it's been since last June. Price readings in this report are little changed.

The service sector is more important than ever to the U.S. outlook given weakness in the manufacturing sector. Coming up next at 10:00 a.m. ET will be the ISM non-manufacturing report which has been running very strong and also includes data on the construction and mining sectors.

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 declined - 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 59.5.

ISM Services - Business Activity Sub-Index

The New Orders Index declined 1.3 and is currently at 57.9.

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 May for the 64th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 55.7 percent in May, 2.1 percentage points lower than the April reading of 57.8 percent. This represents continued growth in the non-manufacturing sector although at a slower rate. The Non-Manufacturing Business Activity Index decreased to 59.5 percent, which is 2.1 percentage points lower than the April reading of 61.6 percent, reflecting growth for the 70th consecutive month at a slower rate. The New Orders Index registered 57.9 percent, 1.3 percentage points lower than the reading of 59.2 percent registered in April. The Employment Index decreased 1.4 percentage points to 55.3 percent from the April reading of 56.7 percent and indicates growth for the 15th consecutive month. The Prices Index increased 5.8 percentage points from the April reading of 50.1 percent to 55.9 percent, indicating prices increased in May for the third consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in May. Overall there has been a slight slowing in the rate of growth for the non-manufacturing sector. Respondents' comments are mostly positive about business conditions and indicate economic growth will continue.


The 15 non-manufacturing industries reporting growth in May — listed in order — are: Arts, Entertainment & Recreation; Management of Companies & Support Services; Real Estate, Rental & Leasing; Utilities; Transportation & Warehousing; Construction; Accommodation & Food Services; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Public Administration; Wholesale Trade; Educational Services; Finance & Insurance; Retail Trade; and Health Care & Social Assistance. The only industry reporting contraction in May is: Mining.

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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