Surprising most pundits who expected a less good business conditions in August 2011, ISM non-manufacturing survey (NMI) indicated conditions improved month-over-month. This month’s data, even though improved, is at levels suggesting sluggish growth.
Above 50, business is expanding. At 52.7 this survey is saying the respondents overall think business is growing. The problem is that the NMI is so new that its ups and downs cannot be correlated with a long history to the economic situation as it is unfolding.
And this is a survey, a quantification of opinion. Survey’s are notoriously bad at spotting economic turning points.
However, Econintersect does give serious consideration to this survey because the service sector accounts for 80% of the economy and 90% of employment. According to Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee:
According to the NMI, 10 non-manufacturing industries reported growth in August. Respondents’ comments remain mixed. There is a degree of uncertainty concerning business conditions for the balance of the year.”
The 10 non-manufacturing industries reporting growth in August based on the NMI composite index — listed in order — are: Mining; Information; Retail Trade; Wholesale Trade; Transportation & Warehousing; Accommodation & Food Services; Agriculture, Forestry, Fishing & Hunting; Utilities; Public Administration; and Professional, Scientific & Technical Services. The five industries reporting contraction in August are: Educational Services; Arts, Entertainment & Recreation; Management of Companies & Support Services; Health Care & Social Assistance; and Finance & Insurance.
WHAT RESPONDENTS ARE SAYING …
- “Overall prices paid are increasing, while sales are still slightly behind projections.” (Public Administration)
- “This month we have seen a downward trend in sales activities due to weather and economic conditions.” (Construction)
- “Customer traffic is trending lower, but spending per person continues to increase. Labor cost savings realized through attrition, as fewer replacements are hired. The outlook for the remainder of 2011 is cautiously optimistic, with increased investment in marketing. ‘Sticky prices’ are keeping operating expenses elevated even as commodity supply eases.” (Arts, Entertainment & Recreation)
- “We had a good first half. Starting to see inflation in many of our input costs. Consumer demand is flat.” (Agriculture, Forestry, Fishing & Hunting)
- “Business is holding, but looking weaker toward fourth quarter.” (Professional, Scientific & Technical Services)
The ISM surveys has meaningless information when you are trying to drill into economic releases to determine the rate of change of the economy overall. Econintersect believes that new orders are the window into the economy for the service sector ISM.
The above graph illustrates the new order index portion of the NMI since inception of the index. At the current level of 52.8 (red line in the graph drawn at 53.5), is very close to the level past recessions have started. Although the movement this month is positive, this portion of the index is in an overall downtrend since mid 2010.
My comment last month remains valid this month also:
Economic weakness is being signaled literally across all the indicators. It is real easy for a pundit to start screaming recession. When you have a mindset that the recovery was smoke and mirrors, and now that the stimulus is wearing off the economy is drifting back towards equilibrium. We must consider that the real answer might be that the Great Recession never ended.
Will the current situation be recognized in hindsight as an early realization of The Great Depression 2.0?