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posted on 05 April 2016

March 2016 ISM Services Index Stronger

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved insignificantly from 53.4 to 54.5 (above 50 signals expansion). Important internals likewise improved, and remain in expansion. Market PMI Services Index was released this morning, and is now in expansion..

This was below expectations (from Bloomberg) of 52.9 to 55.2 (consensus 54.0).

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

Released On 4/5/2016 9:45:00 AM For Mar, 2016
Prior Actual
Level 49.7 51.3

The bulk of the nation's economy expanded but only modestly in March based on Markit Economics' service-sector sample where the PMI came in at a plus-50 level of 51.3 which is up 3 tenths from the March flash and up 1.6 points from February. But the improvement does not include new orders where growth, in an ominous indication for overall activity in the coming months, is at its lowest point in the 6-1/2 year history of the report. Backlog orders are also down. The weakness in orders contributed to a fall in business confidence to another record low. A positive is employment growth, at least for now. Price data are subdued with inputs flat and selling prices up only marginally. The order readings in this report point to increasing slowing for the economy's main engine, services. Up ahead is the ISM non-manufacturing report.

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 2.0 points and now is at 59.8.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 1.2 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:

Economic activity in the non-manufacturing sector grew in March for the 74th 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 54.5 percent in March, 1.1 percentage points higher than the February reading of 53.4 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased to 59.8 percent, 2 percentage points higher than the February reading of 57.8 percent, reflecting growth for the 80th consecutive month, with a faster rate in March. The New Orders Index registered 56.7 percent, 1.2 percentage points higher than the reading of 55.5 percent in February. The Employment Index increased 0.6 percentage point to 50.3 percent from the February reading of 49.7 percent and indicates growth after a month of contraction. The Prices Index increased 3.6 percentage points from the February reading of 45.5 percent to 49.1 percent, indicating prices decreased in March for the fifth time in the last seven months. According to the NMI®, 12 non-manufacturing industries reported growth in March. The majority of respondents' comments indicate that business conditions are mostly positive and that the economy is stable and will continue on a course of slow, steady growth."


The 12 non-manufacturing industries reporting growth in March — listed in order — are: Educational Services; Information; Wholesale Trade; Finance & Insurance; Health Care & Social Assistance; Retail Trade; Mining; Management of Companies & Support Services; Accommodation & Food Services; Public Administration; Utilities; and Professional, Scientific & Technical Services. The two industries reporting contraction in March are: Arts, Entertainment & Recreation; and Transportation & Warehousing

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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