Written by Steven Hansen
The November 2012 ISM non-manufacturing (aka services) index continues its 2+ year growth cycle, and improved moderately from 54.2 to 54.7 (above 50 signals expansion). This was much better than the market forecast of 53.0 to 53.7 which was expecting a decline.
The economically intuitive components of this index remain in expansion territory, and is signalling the economy is not near a recession in November 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. Both are in expansion territory, and both improved significantly this month.
The Business Activity sub-index grew 5.8 points (after dropping 4.5 points the previous month). It is in expansion territory – and is now in the middle of the range seen since the end of the recession.
ISM Services – Business Activity Sub-Index
The New Orders Index rose 3.3 points after falling 2.9 points last month. This sub-index is in expansion territory – and is also in the middle of the range seen since the end of the recession.
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 54.7 percent in November, 0.5 percentage point higher than the 54.2 percent registered in October. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 61.2 percent, which is 5.8 percentage points higher than the 55.4 percent reported in October, reflecting growth for the 40th consecutive month. The New Orders Index increased by 3.3 percentage points to 58.1 percent. The Employment Index decreased by 4.6 percentage points to 50.3 percent, indicating growth in employment for the fourth consecutive month but at a slower rate. The Prices Index decreased 8.6 percentage points to 57 percent, indicating prices increased at a slower rate in November when compared to October. According to the NMI™, 11 non-manufacturing industries reported growth in November. Respondents’ comments are mixed; however, the majority of survey respondents reflect a cautious optimism about current economic conditions.”
INDUSTRY PERFORMANCE – The 11 non-manufacturing industries reporting growth in November — listed in order — are: Agriculture, Forestry, Fishing & Hunting; Utilities; Retail Trade; Real Estate, Rental & Leasing; Finance & Insurance; Public Administration; Construction; Health Care & Social Assistance; Professional, Scientific & Technical Services; Information; and Other Services. The six industries reporting contraction in November — listed in order — are: Mining; Educational Services; Management of Companies & Support Services; Transportation & Warehousing; Accommodation & Food Services; and Wholesale Trade.
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