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posted on 04 May 2016

April 2016 ISM Services Index Slightly Stronger

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved insignificantly from 54.5 to 55.7 (above 50 signals expansion). Important internals were mixed but remain in expansion. Market PMI Services Index was released this morning, and also remains in expansion..

This was above expectations (from Bloomberg) of 53.5 to 55.5 (consensus 54.7).

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 5/4/2016 9:45:00 AM For Apr, 2016
Prior Consensus Consensus Range Actual
Level 51.3 52.0 51.5 to 52.5 52.8

The services PMI for April came in at a soft but still expansionary plus-50 reading of 52.8 in April, up from 52.1 in April's flash and 51.3 in March. April's final is the best reading since January and points to moderate growth for the bulk of the U.S. economy. New orders bounced up from a survey low in March while business activity also improved. Not improving, however, and echoing this morning's ADP report is employment which softened in the month for the weakest rate of growth so far this year. Weakness in employment reflects, to a significant degree, contraction in backlogs which are down for a 9th straight month. Input prices rose in the month, reflecting higher energy costs, but selling prices remained unchanged which points to further pressure on operating margins. Though better than March, the April report still reflects caution over the economic outlook.

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.

The Business Activity sub-index declined 1.0 point and now is at 58.8.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 3.2 and is currently at 59.9.

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 April for the 75th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 55.7 percent in April, 1.2 percentage points higher than the March reading of 54.5 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index decreased to 58.8 percent, 1 percentage point lower than the March reading of 59.8 percent, reflecting growth for the 81st consecutive month, at a slower rate in April. The New Orders Index registered 59.9 percent, 3.2 percentage points higher than the reading of 56.7 percent in March. The Employment Index increased 2.7 percentage points to 53 percent from the March reading of 50.3 percent and indicates growth for the second consecutive month. The Prices Index increased 4.3 percentage points from the March reading of 49.1 percent to 53.4 percent, indicating prices increased in April for the first time in three months. According to the NMI®, 13 non-manufacturing industries reported growth in April. The majority of the respondents' comments reflect optimism about the business climate and the direction of the economy.


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