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posted on 03 March 2016

February 2016 ISM Services Index Essentially Unchanged

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined insignificantly from 53.5 to 53.4 (above 50 signals expansion). Important internals likewise declined, however, and remain in expansion. Markit PMI Services Index was released this morning, was in contraction, and also declined.

This was below expectations (from Bloomberg) of 52.0 to 54.0 (consensus 53.1).

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

Released On 3/3/2016 9:45:00 AM For Feb, 2016
Prior Actual
Level 53.2 49.7

Markit Economics' U.S. service sample reported unusually flat activity in February with the final PMI at 49.7 vs 49.8 for the February flash and against 53.7 in January. This is the weakest reading since the government shutdown of 2013.

New orders are still growing but, after three months of slowing, are at their weakest pace since January last year. The 12-month outlook, though still positive, is the least positive in 5-1/2 years. Hiring, in an upbeat indication for tomorrow's employment report, is still solid but how long it can sustain strength is in question. Price data are not favorable with inputs down and selling prices down at a 5-month low.

Slowing in the service sector would leave the economy without a central point of strength. The declines in this report, though possibly reflecting weather factors during the month, do raise the important question whether domestic demand is on the downswing and falling in line with sinking demand overseas.

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 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 3.9 points and now is at 57.8.

ISM Services - Business Activity Sub-Index

The New Orders Index declined 1.0 and is currently at 55.5.

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 February for the 73rd consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., CFPM, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. "The NMI® registered 53.4 percent in February, 0.1 percentage point lower than the January reading of 53.5 percent. This represents continued growth in the non-manufacturing sector at a slightly slower rate. The Non-Manufacturing Business Activity Index increased to 57.8 percent, 3.9 percentage points higher than the January reading of 53.9 percent, reflecting growth for the 79th consecutive month at a faster rate. The New Orders Index registered 55.5 percent, 1 percentage point lower than the reading of 56.5 percent in January. The Employment Index decreased 2.4 percentage points to 49.7 percent from the January reading of 52.1 percent and indicates contraction after 23 consecutive months of growth. This is the first time the employment index has contracted since February 2014. The Prices Index decreased 0.9 percentage point from the January reading of 46.4 percent to 45.5 percent, indicating prices decreased in February for the fourth time in the last six months. According to the NMI®, 14 non-manufacturing industries reported growth in February. The majority of the respondents' comments continue to be positive about business conditions. The respondents are projecting a slight optimism in regards to the overall economy. There is an increase in the number of industries reflecting growth in both New Orders and Business Activity; however, the NMI® has decreased slightly due to the contraction in the Employment index."


The 14 non-manufacturing industries reporting growth in February — listed in order — are: Accommodation & Food Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; Utilities; Construction; Finance & Insurance; Transportation & Warehousing; Professional, Scientific & Technical Services; Public Administration; Health Care & Social Assistance; Agriculture, Forestry, Fishing & Hunting; Educational Services; Information; and Wholesale Trade. The three industries reporting contraction in February are: Mining; Arts, Entertainment & Recreation; and Retail Trade.

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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