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posted on 06 July 2016

June 2016 ISM Services Index Improves.

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved from 52.9 to 56.5 (above 50 signals expansion). Important internals improved and remain in expansion. Market PMI Services Index was released this morning, was statistically unchanged and remains in expansion..

This was below expectations (from Bloomberg) of 52.0 to 54.1 (consensus 53.3).

For comparison, the Market PMI Services Index was released today - and was statistically unchanged. Here is the analysis from Bloomberg:

Released On 7/6/2016 9:45:00 AM For Jun, 2016
Prior Actual
Level 51.3 51.4

New orders picked up but only to a moderate pace for Markit Economics' U.S. service sector sample where the final PMI for June came in at 51.4, little changed from 51.3 readings for both the June flash and May final. New orders are at their best reading of the year but are still below trend. And backlog orders continue to decline, down now for 11 straight months. Firms in the sample are hiring but not very much with job growth at a 17-month low. Optimism in the general outlook, down four of the last five months, is at a survey low. Price data are muted despite the rise in fuel costs. The bulk of the U.S. economy is chugging along at marginal rates of growth heading into Brexit fallout.

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 improved 4.4 points and now is at 59.5.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 5.7 and is currently at 59.9.

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 June for the 77th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 56.5 percent in June, 3.6 percentage points higher than the May reading of 52.9 percent. This represents continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index increased to 59.5 percent, 4.4 percentage points higher than the May reading of 55.1 percent, reflecting growth for the 83rd consecutive month, at a faster rate in June. The New Orders Index registered 59.9 percent, 5.7 percentage points higher than the reading of 54.2 percent in May. The Employment Index grew 3 percentage points in June after one month of contraction to 52.7 percent from the May reading of 49.7 percent. The Prices Index decreased 0.1 percentage point from the May reading of 55.6 percent to 55.5 percent, indicating prices increased in June for the third consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in June. Respondents' comments are mostly positive about business conditions and the economy. Overall, the report reflects a strong rebound from the 'cooling-off' of the previous month for the non-manufacturing sector.


The 15 non-manufacturing industries reporting growth in June — listed in order — are: Mining; Arts, Entertainment & Recreation; Management of Companies & Support Services; Retail Trade; Health Care & Social Assistance; Utilities; Real Estate, Rental & Leasing; Accommodation & Food Services; Transportation & Warehousing; Wholesale Trade; Information; Public Administration; Agriculture, Forestry, Fishing & Hunting; Construction; and Finance & Insurance. The three industries reporting contraction in June are: Educational Services; Professional, Scientific & Technical Services; and Other 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.

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