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posted on 05 February 2018

January 2018 ISM and Markit Services Mixed

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continues its growth cycle and improved. Markit PMI Services Index marginally declined but remains in expansion.

Analyst Opinion of the ISM and Markit Services Survey

Both services surveys are in expansion - but their intensity of growth were very different.

From Bloomberg / Econoday:

Consensus Range Consensus Actual
Markit Services 53.3 to 53.5 53.3 53.3
ISM Services 55.2 to 57.0 56.2 59.9

From Markit:

Business activity growth softens to seven-month low in December

  • Upturn in output softens but remains solid
  • New business expands at fastest pace since September 2017
  • Backlogs increase at joint-strongest rate since March 2015
  • January survey data indicated a solid rise in U.S. service sector business activity, though the rate of growth eased for a third month running to reach a nine-month low. That said, new business continued to expand strongly, with the upturn accelerating to the fastest since last September.
  • Greater client demand was reflected in a faster rate of backlog accumulation. The level of outstanding business increased at the joint-quickest pace since March 2015. Meanwhile, inflationary pressures strengthened with both input cost and selling price inflation accelerating.
  • The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 53.3 in January, down from 53.7 in December. The latest index reading signalled a solid expansion in business activity among service providers, albeit the slowest since April 2017. Anecdotal evidence linked the latest upturn to more favourable economic conditions.

z%20markit_services.png

From the ISM Services report:

Economic activity in the non-manufacturing sector grew in January for the 96th 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., A.P.P., CFPM, Chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee: "The NMI® registered 59.9 percent, which is 3.9 percentage points higher than the seasonally adjusted December reading of 56 percent. This represents continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index increased to 59.8 percent, 2 percentage points higher than the seasonally adjusted December reading of 57.8 percent, reflecting growth for the 102nd consecutive month, at a faster rate in January. The New Orders Index registered 62.7 percent, 8.2 percentage points higher than the seasonally adjusted reading of 54.5 percent in December. The Employment Index increased 5.3 percentage points in January to 61.6 percent from the seasonally adjusted December reading of 56.3 percent. The Prices Index increased by 2 percentage points from the seasonally adjusted December reading of 59.9 percent to 61.9 percent, indicating that prices increased in January for the 23rd consecutive month. According to the NMI®, 15 non-manufacturing industries reported growth. The non-manufacturing sector reflected strong growth in January after two consecutive months of pullback. Overall, the majority of respondents' comments are positive about business conditions and the economy. They also indicated that recent tax changes have had a positive impact on their respective businesses."

INDUSTRY PERFORMANCE

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

There are two sub-indexes in the ISM Services 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 2.0 points and now is at 59.8

ISM Services - Business Activity Sub-Index

The New Orders Index improved 8.2 and is currently at 62.7.

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.

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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