Written by Steven Hansen
The May 2012 ISM non-manufacturing index continues its 2+ year growth cycle, rising marginally from 53.5 to 53.7 (above 50 signals expansion). The index value was above market estimates which ranged from 52.0 to 53.1. The most important elements of this survey remain clearly in expansion territory.
The better news is that the economically intuitive components of this index remain in expansion territory – and strengthened. The big monthly swings of this index in the New Normal are indicative of an economy whose growth is pulsing.
There are two sub-indexes in the NMI which have good correlations to the economy – the Business Activity Index and the New Orders Index – and both have good track records 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 sub-index improved one point. It remains in expansion territory – but is on the weak side of normal.
The New Orders Index improved 2 points. This sub-index too remains in expansion territory – but is on the weak side of normal.
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 and is not hard data.
From the ISM report:
“The NMI registered 53.7 percent in May, 0.2 percentage point higher than the 53.5 percent registered in April. This indicates continued growth this month at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 55.6 percent, which is 1 percentage point higher than the 54.6 percent reported in April, reflecting growth for the 34th consecutive month. The New Orders Index increased by 2 percentage points to 55.5 percent, and the Employment Index decreased by 3.4 percentage points to 50.8 percent, indicating continued growth in employment at a slower rate. The Prices Index decreased 3.8 percentage points to 49.8 percent, indicating lower month-over-month prices for the first time since July 2009. According to the NMI, 13 non-manufacturing industries reported growth in May. The majority of the respondents’ comments are positive and optimistic about business conditions and the direction of the economy.”
INDUSTRY PERFORMANCE – The 13 non-manufacturing industries reporting growth in May — listed in order — are: Information; Transportation & Warehousing; Accommodation & Food Services; Management of Companies & Support Services; Educational Services; Wholesale Trade; Construction; Retail Trade; Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Finance & Insurance; Utilities; and Public Administration. The three industries reporting contraction in May are: Arts, Entertainment & Recreation; Health Care & Social Assistance; and Mining.
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.