Written by Steven Hansen
The March 2012 ISM non-manufacturing index continues a strong growth cycle falling from 57.3 to 56.0 (above 50 signals expansion). The number was at the low end of market estimates ranging from 56.0 to 56.7. The most important elements of this survey remain clearly in expansion territory – and this survey continues to be strong.
Whether this index rises or falls in a particular month is not material – it is the long term trend lines. Here, the index is swinging around wildly – and it is hard to argue any long term trend. The good news is that the important components of this index remain clearly in expansion territory. The big monthly swings of this index in the New Normal are indicative of a manic depressive (bipolar) sector – or an economy whose growth is pulsing.
There are two sub-indexes in the NMI which have a good correlation to the economy – the Business Activity Index and the New Orders Index – and both have a good track record in spotting an incipient recession. Both of these indices are saying the economy is improving, and a recession is not in the cards.
The Business Activity Index was down significantly – but remains firmly in expansion territory.
The New Orders Index also was down significantly. This index remains well away from recession territory.
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; this is not hard data.
From the ISM report:
“The NMI registered 56 percent in March, 1.3 percentage points lower than the 57.3 percent registered in February, and indicating continued growth at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 58.9 percent, which is 3.7 percentage points lower than the 62.6 percent reported in February, reflecting growth for the 32nd consecutive month. The New Orders Index decreased by 2.4 percentage points to 58.8 percent, and the Employment Index increased by 1 percentage point to 56.7 percent, indicating continued growth in employment at a slightly faster rate. The Prices Index decreased 4.5 percentage points to 63.9 percent, indicating prices increased at a slower rate in March when compared to February. According to the NMI, 16 non-manufacturing industries reported growth in March. Respondents’ comments remain mostly optimistic about business conditions. They indicate that increased discretionary spending reflects the increased confidence level of businesses and consumers. There is continued concern about cost pressures and the instability of fuel prices.”
The 16 non-manufacturing industries reporting growth in March — listed in order — are: Arts, Entertainment & Recreation; Management of Companies & Support Services; Accommodation & Food Services; Construction; Other Services; Wholesale Trade; Finance & Insurance; Information; Public Administration; Health Care & Social Assistance; Utilities; Real Estate, Rental & Leasing; Retail Trade; Educational Services; Professional, Scientific & Technical Services; and Transportation & Warehousing. The two industries reporting contraction in March are: Mining; and Agriculture, Forestry, Fishing & Hunting.
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.