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posted on 03 August 2016

July 2016 ISM Services Index Growth Marginally Slows.

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined from 56.5 to 55.5 (above 50 signals expansion). Important internals improved and remain in expansion. Markit PMI Services Index was released this morning, was statistically unchanged and remains in expansion..

This was below expectations (from Bloomberg / Econoday) of 55.5 to 57.0 (consensus 56.0).

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

Released On 8/3/2016 9:45:00 AM For Jul, 2016
Prior Actual
Level 51.4 51.4

Slow growth is the verdict of Markit's U.S. service sample whose composite index came in only slightly above breakeven 50, at 51.4 for final July which is unchanged from June and up 5 tenths from the July flash. Growth in new orders is, however, a major negative for July with a bounce back for employment, which hit a deep low in June, a standout positive. Another positive, one especially for employment, is an uptick in the year-ahead outlook. Inflation data are once again subdued. This report, especially for orders, has not been running very strongly this year, in contrast to the ISM non-manufacturing report which will be posted at 10:00 a.m. ET this morning.

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 0.2 points and now is at 59.3.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 0.4 and is currently at 60.3.

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 July for the 78th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 55.5 percent in July, 1 percentage point lower than the June reading of 56.5 percent. This represents continued growth in the non-manufacturing sector at a slower rate. The Non-Manufacturing Business Activity Index decreased to 59.3 percent, 0.2 percentage point lower than the June reading of 59.5 percent, reflecting growth for the 84th consecutive month, at a slightly slower rate in July. The New Orders Index registered 60.3 percent, 0.4 percentage point higher than the reading of 59.9 percent in June. The Employment Index decreased 1.3 percentage points in July to 51.4 percent from the June reading of 52.7 percent. The Prices Index decreased 3.6 percentage points from the June reading of 55.5 percent to 51.9 percent, indicating prices increased in July for the fourth consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth in July. The majority of the respondents' comments reflect stability and continued growth for their respective companies and a positive outlook on the economy.


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

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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