Written by Steven Hansen
The July 2012 ISM non-manufacturing index continues its 2+ year growth cycle, and rose marginally from 52.1 to 52.6 (above 50 signals expansion). This was below the market forecast of 52.0 to 52.3.
The economically intuitive components of this index remain in expansion territory. Please consider this report a major reversal of last month’s decline, and is signalling the economy is not near a recession in July 2012.
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 rose 5.5 points after falling 3.9 points last month. It remains in expansion territory – and is now above mid channel of the growth seen since the end of the recession.
ISM Services – Business Activity Sub-Index
The New Orders Index improved 1.0 points after falling 2.2 points last month. This sub-index is on the lower end of the channel seen since the end of the Great Recession.
ISM Services – New Orders Sub-Index
The complete ISM manufacturing and non-manufacturing survey table is below.
From the ISM report:
“The NMI registered 52.6 percent in July, 0.5 percentage point higher than the 52.1 percent registered in June. This indicates continued growth this month at a slighter faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 57.2 percent, which is 5.5 percentage points higher than the 51.7 percent reported in June, reflecting growth for the 36th consecutive month. The New Orders Index increased by 1 percentage point to 54.3 percent. The Employment Index decreased by 3 percentage points to 49.3 percent, indicating contraction in employment for the first time since December 2011. The Prices Index increased 6 percentage points to 54.9 percent, indicating higher month-over-month prices when compared to June. According to the NMI, 11 non-manufacturing industries reported growth in July. Respondents’ comments are mixed and vary by industry and company.”
INDUSTRY PERFORMANCE – The 11 non-manufacturing industries reporting growth in July — listed in order — are: Accommodation & Food Services; Retail Trade; Utilities; Other Services; Educational Services; Arts, Entertainment & Recreation; Information; Real Estate, Rental & Leasing; Finance & Insurance; Public Administration; and Management of Companies & Support Services. The seven industries reporting contraction in July — listed in order — are: Mining; Agriculture, Forestry, Fishing & Hunting; Construction; Health Care & Social Assistance; Transportation & Warehousing; Wholesale Trade; 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