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posted on 05 October 2015

September 2015 ISM Services Index Again Declines

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined from 59.0 to 56.9 (above 50 signals expansion). Important internals likewise declined but remain in expansion. Market PMI Services Index was released this morning, also is in expansion, and also declined..

This was above expectations of 57.0 to 58.8 (consensus 58.0).

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

Released On 10/5/2015 9:45:00 AM For Sep, 2015
Prior Consensus Consensus Range Actual
Level 56.1 55.8 54.8 to 58.0 55.1

Recent History Of This Indicator
The services PMI has been running in the mid-50s to indicate very solid growth in composite activity and the Econoday consensus is calling for a September reading of 55.8. But new orders have been slowing and service providers have been working down backlogs to keep busy. It hasn't stopped the sample from hiring, however, which the report has been describing all year as "robust". Price readings have been in contraction.

Definition
US Services Purchasing Managers' Index (PMI) is based on monthly questionnaire surveys collected from over 400 U.S. companies which provide a leading indication of what is happening in the private sector services economy. It is seasonally adjusted and is calculated from seven components, including New Business, Employment and Business Expectations. Why Investors Care

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

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

The Business Activity sub-index declined 3.7 points and now is at 60.2.

ISM Services - Business Activity Sub-Index

The New Orders Index declined 6.7 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:

The NMI® registered 56.9 percent in September, 2.1 percentage points lower than the August reading of 59 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 60.2 percent, which is 3.7 percentage points lower than the August reading of 63.9 percent, reflecting growth for the 74th consecutive month at a slower rate. The New Orders Index registered 56.7 percent, 6.7 percentage points lower than the reading of 63.4 percent in August. The Employment Index increased 2.3 percentage points to 58.3 percent from the August reading of 56 percent and indicates growth for the 19th consecutive month. The Prices Index decreased 2.4 percentage points from the August reading of 50.8 percent to 48.4 percent, indicating prices decreased in September for the first time since February of this year. According to the NMI®, 13 non-manufacturing industries reported growth in September. There has been a cooling off in the rate of growth during the month of September. Also, the trend of lower costs and little pricing power continues as reflected in the contraction of the pricing index. Overall, respondents continue to remain positive about current business conditions.

INDUSTRY PERFORMANCE

The 13 non-manufacturing industries reporting growth in September — listed in order — are: Educational Services; Construction; Finance & Insurance; Health Care & Social Assistance; Utilities; Wholesale Trade; Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Management of Companies & Support Services; Accommodation & Food Services; Information; Public Administration; and Transportation & Warehousing. The four industries reporting contraction in September are: Mining; Arts, Entertainment & Recreation; Retail Trade; 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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