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Originally posted on 06 January 2014

December 2013 ISM Services Index Internals Very Weak

Posted by John Lounsbury or Steven Hansen

Written by

The December 2013 ISM non-manufacturing (aka services) index continues its growth cycle, but weakened from 53.9  to 53.0 (above 50 signals expansion).  One important report internal crashed.

This was at the lower end of the range of market forecasts of 53.0 to 54.6.

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 the Business Activity Index and the New Orders Index declined - with new orders shifting into contraction.

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 lost 0.3 points and now is at 55.2.

ISM Services - Business Activity Sub-Index

The New Orders Index declined 7.0 and is currently at 49.4.

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 December for the 48th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business.

The NMI registered 53 percent in December, 0.9 percentage point lower than November's reading of 53.9 percent. This indicates continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 55.2 percent, which is 0.3 percentage point lower than the 55.5 percent reported in November, reflecting growth for the 53rd consecutive month, but at a slightly slower rate. The New Orders Index contracted after 52 consecutive months of growth for the first time since July 2009, when it registered 48 percent. The index decreased significantly by 7 percentage points to 49.4 percent, and the Employment Index increased 3.3 percentage points to 55.8 percent, indicating growth in employment for the 17th consecutive month and at a faster rate. The Prices Index increased 2.9 percentage points to 55.1 percent, indicating prices increased at a faster rate in December when compared to November. According to the NMI®, eight non-manufacturing industries reported growth in December. Despite the substantial decrease in the New Orders Index, respondents' comments predominately reflect that business conditions are stable.

INDUSTRY PERFORMANCE - The eight non-manufacturing industries reporting growth in December — listed in order — are: Management of Companies & Support Services; Retail Trade; Other Services; Finance & Insurance; Public Administration; Construction; Information; and Health Care & Social Assistance. The eight industries reporting contraction in December — listed in order — are: Mining; Arts, Entertainment & Recreation; Educational Services; Transportation & Warehousing; Real Estate, Rental & Leasing; Utilities; Wholesale Trade; and Accommodation & Food 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

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