Written by Steven Hansen
The August 2013 ISM non-manufacturing (aka services) index continues its growth cycle, improving from 56.0 to 58.6 (above 50 signals expansion) – and the internals were even stronger.
This was well above the range of market forecasts of 54.0 to 54.5.
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 inside expansion territory – and both improved and have a higher value than the main non-manufacturing index.
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 1.8 points and now is at 62.2.
ISM Services – Business Activity Sub-Index
The New Orders Index rose 2.8 and is currently at 60.5.
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:
Economic activity in the non-manufacturing sector grew in August for the 44th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.
“The NMI™ registered 58.6 percent in August, 2.6 percentage points higher than the 56 percent registered in July. This indicates continued growth at a faster rate in the non-manufacturing sector. This month’s NMI™ is the highest reading for the index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 62.2 percent, which is 1.8 percentage points higher than the 60.4 percent reported in July, reflecting growth for the 49th consecutive month. The New Orders Index increased by 2.8 percentage points to 60.5 percent, and the Employment Index increased 3.8 percentage points to 57 percent, indicating growth in employment for the 13th consecutive month. The Prices Index decreased 6.7 percentage points to 53.4 percent, indicating prices increased at a significantly slower rate in August when compared to July. According to the NMI™, 16 non-manufacturing industries reported growth in August. The majority of respondents’ comments continue to be mostly positive about business conditions and the direction of the overall economy.”
INDUSTRY PERFORMANCE – The 16 non-manufacturing industries reporting growth in August — listed in order — are: Educational Services; Management of Companies & Support Services; Information; Accommodation & Food Services; Public Administration; Construction; Finance & Insurance; Professional, Scientific & Technical Services; Retail Trade; Utilities; Transportation & Warehousing; Real Estate, Rental & Leasing; Agriculture, Forestry, Fishing & Hunting; Other Services; Wholesale Trade; and Health Care & Social Assistance. The two industries reporting contraction in August are: Mining; and Arts, Entertainment & Recreation.
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