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posted on 04 November 2015

October 2015 ISM Services Index Improves

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved from 56.9 to 59.1 (above 50 signals expansion). Important internals likewise improved and remain in expansion. Market PMI Services Index was released this morning, also is in expansion, and declined..

This was above expectations of 55.0 to 57.5 (consensus 56.7).

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

Released On 11/4/2015 9:45:00 AM For Oct, 2015
Prior Consensus Consensus Range Actual
Level 55.1 54.8 54.4 to 55.3 54.8

Growth in Markit's U.S. service sector sample is slowing slightly, coming in at a final 54.8 vs the flash reading of 54.4 and vs September's final reading of 55.1. Details are soft with growth in new business at its slowest pace since January and with backlogs down for a third straight month.

Weakness in orders in turn is pulling down 12-month expectations which are near July's three-year low. Employment is described as modest with hiring at its slowest pace since February. Price readings are mute.

Despite the soft details, the service sector is still humming along solidly and helping to offset weakness in manufacturing. ISM's non-manufacturing report will be posted this morning at 10:00 a.m. ET.

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 improved 2.8 points and now is at 63.0.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 5.3 and is currently at 62.0.

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 October for the 69th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 59.1 percent in October, 2.2 percentage points higher than the September reading of 56.9 percent. This represents continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index increased to 63 percent, which is 2.8 percentage points higher than the September reading of 60.2 percent, reflecting growth for the 75th consecutive month at a faster rate. The New Orders Index registered 62 percent, 5.3 percentage points higher than the reading of 56.7 percent in September. The Employment Index increased 0.9 percentage point to 59.2 percent from the September reading of 58.3 percent and indicates growth for the 20th consecutive month. The Prices Index increased 0.7 percentage point from the September reading of 48.4 percent to 49.1 percent, indicating prices decreased in October for the second consecutive month. According to the NMI®, 14 non-manufacturing industries reported growth in October. After the slight cooling off in September, the non-manufacturing sector reflected growth across most of the indexes. Respondents remain mostly positive about business conditions and the overall economy.


The 14 non-manufacturing industries reporting growth in October — listed in order — are: Transportation & Warehousing; Health Care & Social Assistance; Professional, Scientific & Technical Services; Utilities; Retail Trade; Construction; Management of Companies & Support Services; Information; Finance & Insurance; Other Services; Arts, Entertainment & Recreation; Public Administration; Wholesale Trade; and Accommodation & Food Services. The only industry reporting contraction in October 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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