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posted on 06 July 2015

June 2015 ISM Services Index Improved But Came In Under Expectations

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved marginally from 55.7 to 56.0 (above 50 signals expansion). Important internals improved and remains in expansion. Market PMI Services Index was released this morning and also is in expansion but declined.

This was below consensus 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 7/6/2015 9:45:00 AM For Jun, 2015
Prior Consensus Consensus Range Actual
Level 56.8 55.1 54.8 to 56.5 54.8

Recent History Of This Indicator
The services PMI index proved prophetic, offering with its mid-month flash reading - down 1.7 points to 54.8 - the first striking indication that June, later confirmed by the employment report and by vehicle sales, would prove to be a soft month. Growth rates for new orders and shipments were among the slowest of the year in the services report. Watch for specific comments on hiring and whether service firms are having an increasingly difficult time finding new employees.

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 improved 2.0 points and now is at 61.5.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 0.4 and is currently at 58.3.

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 June for the 65th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

"The NMI® registered 56 percent in June, 0.3 percentage point higher than the May reading of 55.7 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased to 61.5 percent, which is 2 percentage points higher than the May reading of 59.5 percent, reflecting growth for the 71st consecutive month at a faster rate. The New Orders Index registered 58.3 percent, 0.4 percentage point higher than the reading of 57.9 percent registered in May. The Employment Index decreased 2.6 percentage points to 52.7 percent from the May reading of 55.3 percent and indicates growth for the 16th consecutive month. The Prices Index decreased 2.9 percentage points from the May reading of 55.9 percent to 53 percent, indicating prices increased in June for the fourth consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in June. The majority of respondents' comments are positive about business conditions and the economy."


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

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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