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posted on 03 February 2016

January 2016 ISM Services Index Declines But Remains in Expansion

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined from 55.8 to 53.5 (above 50 signals expansion). Important internals likewise declined, however, and remain in expansion. Market PMI Services Index was released this morning, also is in expansion, and also declined.

This was below expectations (from Bloomberg) of 53.0 to 56.5 (consensus 55.5).

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

Released On 2/3/2016 9:45:00 AM For Jan, 2016
Prior Consensus Consensus Range Actual
Level 54.3 53.7 53.5 to 54.8 53.2

Growth is respectable but slowing in the nation's service sector, based on Markit's sample where the composite index came in at 53.2 for final January. This is 5 tenths under both Econoday expectations and the mid-month flash and is a sizable 1.1 points below final December. Growth in new orders, reflecting general business caution, is at a 12-month low while backlog orders are in contraction for a 6th straight month. Solid hiring, however, is part of the reason for the drawdown in backlogs though how long employment can continue to rise while new orders are weak is an open question.

Overall business confidence in the sample did rise in the month but remains close to a 3-1/2 year low. Price data remain subdued but, in what would be a positive for the Fed's efforts to lift inflation, the report does note signs of rising wage pressure.

This report hints at another quarter of subdued growth for the economy. The ISM non-manufacturing report, which samples not only the service sector but also mining and construction, has been showing greater strength. ISM's January data will be posted later 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 declined 5.6 points and now is at 53.9.

ISM Services - Business Activity Sub-Index

The New Orders Index declined 2.4 and is currently at 56.5.

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 January for the 72nd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

"The NMI® registered 53.5 percent in January, 2.3 percentage points lower than the seasonally adjusted December reading of 55.8 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 53.9 percent, which is 5.6 percentage points lower than the seasonally adjusted December reading of 59.5 percent, reflecting growth for the 78th consecutive month at a slower rate. The New Orders Index registered 56.5 percent, 2.4 percentage points lower than the seasonally adjusted reading of 58.9 percent in December. The Employment Index decreased 4.2 percentage points to 52.1 percent from the seasonally adjusted December reading of 56.3 percent and indicates growth for the 23rd consecutive month. The Prices Index decreased 4.6 percentage points from the seasonally adjusted December reading of 51 percent to 46.4 percent, indicating prices decreased in January for the third time in the last five months. According to the NMI®, 10 non-manufacturing industries reported growth in January. The majority of the respondents' comments are positive about business conditions; however, there is a concern that exists relative to global conditions, stock market volatility, and the effect on commercial and consumer confidence."


The 10 non-manufacturing industries reporting growth in January — listed in order — are: Finance & Insurance; Real Estate, Rental & Leasing; Utilities; Retail Trade; Information; Construction; Agriculture, Forestry, Fishing & Hunting; Health Care & Social Assistance; Management of Companies & Support Services; and Public Administration. The eight industries reporting contraction in January — listed in order — are: Mining; Educational Services; Wholesale Trade; Other Services; Arts, Entertainment & Recreation; Accommodation & Food Services; Transportation & Warehousing; and Professional, Scientific & Technical 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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