Written by Steven Hansen
The June 2012 ISM non-manufacturing index continues its 2+ year growth cycle, but fell moderately from 53.7 to 52.1 (above 50 signals expansion). This was below the market forecast of 53.0.
The economically intuitive components of this index remain in expansion territory – but have significantly declined to 2.5 year lows. Although an index decline was expected, the overall softness of the report was surprising.
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.
The Business Activity sub-index declined 3.9 points. It remains in expansion territory – but is now at a 2.5 year low.
ISM Services – Business Activity Sub-Index
The New Orders Index declined 2.2 points. This sub-index too has declined to 2.5 year lows.
ISM Services – New Orders Sub-Index
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 52.1 percent in June, 1.6 percentage points lower than the 53.7 percent registered in May. This indicates continued growth this month at a slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 3.9 percentage points lower than the 55.6 percent reported in May, reflecting growth for the 35th consecutive month. The New Orders Index decreased by 2.2 percentage points to 53.3 percent, and the Employment Index increased by 1.5 percentage points to 52.3 percent, indicating continued growth in employment at a faster rate. The Prices Index decreased 0.9 percentage point to 48.9 percent, indicating lower month-over-month prices for the second consecutive month. According to the NMI, 12 non-manufacturing industries reported growth in June. Respondents’ comments are mixed and vary by industry and company.”
INDUSTRY PERFORMANCE – The 12 non-manufacturing industries reporting growth in June — listed in order — are: Educational Services; Arts, Entertainment & Recreation; Management of Companies & Support Services; Retail Trade; Utilities; Transportation & Warehousing; Accommodation & Food Services; Public Administration; Construction; Information; Finance & Insurance; and Wholesale Trade. The five industries reporting contraction in June are: Mining; Agriculture, Forestry, Fishing & Hunting; Health Care & Social Assistance; Real Estate, Rental & Leasing; and Professional, Scientific & Technical Services.
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.
ISM Services Employment Sub-Index vs BLS Non-Farm Services Employment