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posted on 05 August 2015

July 2015 ISM Services Index Improved and Above Expectations

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved from 56.0 to 60.3 (above 50 signals expansion). Important internals improved and remain in expansion. Market PMI Services Index was released this morning, also is in expansion, and likewise improved.

This was above expectations of 55.0 to 57.5 (consensus 56.2).

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

Released On 8/5/2015 9:45:00 AM For Jul, 2015
Prior Consensus Consensus Range Actual
Level 54.8 55.2 55.0 to 55.2 55.7

Recent History Of This Indicator
The services PMI is expected to end July at a very healthy 55.2. The flash report cited strength in new orders from both the consumer side and the business side with the latter offering one of the few hints of strength for business investment. A negative, however, was softness in the 12-month outlook in a reading that has since been confirmed on the consumer side with declines in the expectations components of both the consumer confidence and consumer sentiment reports.

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 improved - with both remaining in territories associated with 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 3.4 points and now is at 64.9.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 5.5 and is currently at 63.8.

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 July for the 66th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 60.3 percent in July, 4.3 percentage points higher than the June reading of 56 percent. This represents continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index increased to 64.9 percent, which is 3.4 percentage points higher than the June reading of 61.5 percent, reflecting growth for the 72nd consecutive month at a faster rate. The New Orders Index registered 63.8 percent, 5.5 percentage points higher than the reading of 58.3 percent registered in June. The Employment Index increased 6.9 percentage points to 59.6 percent from the June reading of 52.7 percent and indicates growth for the 17th consecutive month. The Prices Index increased 0.7 percentage point from the June reading of 53 percent to 53.7 percent, indicating prices increased in July for the fifth consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in July. The majority of the respondents continue to have a positive outlook on business conditions and the overall economy. This is reflected directly by a number of new highs for some of the indexes.

INDUSTRY PERFORMANCE

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

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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