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posted on 05 October 2016

September 2016 ISM and Markit Services Index Improves

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, and improved from 51.4 to 57.1 (above 50 signals expansion). Important internals strongly improved. Markit PMI Services Index also released today marginally improved and remains in expansion..

Analyst Opinion of the ISM and Markit Services Survey

Last month there was a weak services survey results from both ISM and Markit. It is interesting that the common theme in Markit manufacturing and services surveys was weak employment. The ADP employment report today showed employment was treading water - just keeping up with the employment growth required for population growth.

The Markit and ISM surveys are surprisingly different. The ISM shows strength in its key elements that correlate to economic activity. Markit shows services growth remains weak.

Let us wait again to see what next month brings.

This was below expectations (from Bloomberg / Econoday) of 51.7 to 54.0 (consensus 52.9).

For comparison, the Market PMI Services Index was released earlier - and improved from 51.0 to 52.3. From Markit:

Business activity growth picks up, but job creation eases to 3½ year low

Service sector activity rises at fastest pace since April...

...despite softer upturn in new work during September

Employment growth eases to weakest since March 2013

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 8.5 points and now is at 60.3.

ISM Services - Business Activity Sub-Index

The New Orders Index improved 8.6 and is currently at 60.0.

The complete ISM manufacturing and non-manufacturing survey table is below.

z pmiservices.png

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 September for the 80th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM®Report On Business®.

The NMI® registered 57.1 percent in September, 5.7 percentage points higher than the August reading of 51.4 percent. This represents continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index increased substantially to 60.3 percent, 8.5 percentage points higher than the August reading of 51.8 percent, reflecting growth for the 86th consecutive month, at a noticeably faster rate in September. The New Orders Index registered 60 percent, 8.6 percentage points higher than the reading of 51.4 percent in August. The Employment Index increased 6.5 percentage points in September to 57.2 percent from the August reading of 50.7 percent. The Prices Index increased 2.2 percentage points from the August reading of 51.8 percent to 54 percent, indicating prices increased in September for the sixth consecutive month. According to the NMI®, 14 non-manufacturing industries reported growth in September. The comments from the respondents are mostly positive about business conditions and the overall economy. A degree of uncertainty does exist due to geopolitical conditions coupled with the upcoming U.S. presidential election.


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

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