Written by Steven Hansen
The May 2013 ISM non-manufacturing (aka services) index continues its 2+ year growth cycle, and improved from 53.1 to 53.7 (above 50 signals expansion) – almost completely reversing last month’s loss. This was above the range of market forecasts of 52.5 to 53.5.
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 well inside expansion territory. The Business Activity sub-index improved, while the the new orders sub-index also improved.
This index and its associated sub-indices are fairly volatile – and one needs to step back from the data and view this index over longer periods than a single month.
The Business Activity sub-index rose 1.5 points reversing last month’s loss.
ISM Services – Business Activity Sub-Index
The New Orders Index also remains in the lower half of the levels seen since the end the Great 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 53.7 percent in May, 0.6 percentage point higher than the 53.1 percent registered in April. This indicates continued growth at a slightly faster rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index registered 56.5 percent, which is 1.5 percentage points higher than the 55 percent reported in April, reflecting growth for the 46th consecutive month. The New Orders Index increased by 1.5 percentage points to 56 percent, and the Employment Index decreased 1.9 percentage points to 50.1 percent, indicating growth in employment for the 10th consecutive month. The Prices Index decreased 0.1 percentage point to 51.1 percent, indicating prices increased at a slower rate in May when compared to April. According to the NMI™, 13 non-manufacturing industries reported growth in May. The majority of respondents’ comments are optimistic about business conditions. However, there is a degree of uncertainty about the long-term outlook.
INDUSTRY PERFORMANCE – The 13 non-manufacturing industries reporting growth in May — listed in order — are: Accommodation & Food Services; Transportation & Warehousing; Arts, Entertainment & Recreation; Educational Services; Management of Companies & Support Services; Wholesale Trade; Construction; Public Administration; Information; Retail Trade; Professional, Scientific & Technical Services; Finance & Insurance; and Utilities. The five industries reporting contraction in May are: Mining; Health Care & Social Assistance; Real Estate, Rental & Leasing; Other Services; 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.
ISM Services Employment Sub-Index vs BLS Non-Farm Services Employment