ISM Says Non-Manufacturing Improved in September 2010 – WRONG!

The Institute of Supply Management (ISM) says in September 2010, their non-manufacturing members believe that conditions are improving month-over-month (MoM).  The ISM survey methodology lacks statistical sampling quantification so a small company’s opinion carries the same weight as a large company.

This month, however, the ISM’s shotgun methodology has missed the big picture.   In reality new orders are flat and backlog is falling.  The rest of the survey is window dressing. 

The ISM manufacturing survey was analyzed in Manufacturing New Orders Likely Up in August 2010.  First the ISM headline in part:

Economic activity in the non-manufacturing sector grew in September for the ninth consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

…….”The NMI (Non-Manufacturing Index) registered 53.2 percent in September, 1.7 percentage points higher than the 51.5 percent registered in August, indicating continued growth in the non-manufacturing sector at a faster rate. The Non-Manufacturing Business Activity Index decreased 1.6 percentage points to 52.8 percent, reflecting growth for the 10th consecutive month, but at a slower rate than in August. The New Orders Index increased 2.5 percentage points to 54.9 percent, and the Employment Index increased 2 percentage points to 50.2 percent, indicating growth in employment for the third time in the last five months. The Prices Index decreased 0.2 percentage point to 60.1 percent, indicating that prices increased in September at a slightly slower rate. According to the NMI, 11 non-manufacturing industries reported growth in September. Respondents’ comments continue to be mixed about business conditions, with a slight majority reflecting optimism.”

The 11 industries reporting growth in September based on the NMI composite index — listed in order — are: Management of Companies & Support Services; Information; Professional, Scientific & Technical Services; Wholesale Trade; Utilities; Accommodation & Food Services; Finance & Insurance; Other Services; Health Care & Social Assistance; Retail Trade; and Transportation & Warehousing. The three industries reporting contraction in September are: Mining; Public Administration; and Educational Services.

When I was a Corporate Purchasing Manager, this survey and others were completed by my secretary.  Surveys overall are bar room talk at best.  When you try to quantify opinion, the data will be noisy.  The overall business environment looks better after a 3 martini lunch.

New Orders really is the only metric to understand whether business is growing or contracting.  Looking at the percentages of Purchasing Managers who believe new orders are the same,  Compare the June New Order opinion to September’s – June looks stronger to me but is given a lower index value.   I would be hard pressed to argue there was any real improvement MoM – the opinion appears flat.

The ISM stated:

The eight industries reporting growth of new orders in September — listed in order — are: Management of Companies & Support Services; Information; Accommodation & Food Services; Professional, Scientific & Technical Services; Health Care & Social Assistance; Utilities; Finance & Insurance; and Transportation & Warehousing. The seven industries reporting contraction of new orders in September — listed in order — are: Mining; Other Services; Construction; Retail Trade; Educational Services; Wholesale Trade; and Public Administration.

If hard data confirms, the red flag remains backlog.  Boys and girls, there is no way the economy is improving if backlog is falling.  This smells of overcapacity and further employment cuts coming in non-manufacturing.  The ISM stated:

The four industries reporting an increase in order backlogs in September are: Educational Services; Retail Trade; Finance & Insurance; and Health Care & Social Assistance. The six industries reporting lower backlog of orders in September — listed in order — are: Mining; Other Services; Public Administration; Construction; Wholesale Trade; and Professional, Scientific & Technical Services.

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