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January 2014 ISM Services Index Strengthens

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The January 2014 ISM non-manufacturing (aka services) index continues its growth cycle, and strengthened marginally from 53.0 to 54.0 (above 50 signals expansion).  Important internals also strengthened – but note that last month’s internals were revised upward.

This was slightly higher than the range of market forecasts of 53.5 to 53.8.

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 improved with both in expansion territory.

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 gained 2.0 points and now is at 56.3.

ISM Services – Business Activity Sub-Index

The New Orders Index gained 5.0 and is currently at 50.9.

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 January 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 54 percent in January, 1 percentage point higher than the seasonally adjusted reading of 53 percent registered in December. The Non-Manufacturing Business Activity Index increased to 56.3 percent, which is 2 percentage points higher than the seasonally adjusted reading of 54.3 percent reported in December, reflecting growth for the 54th consecutive month and at a faster rate. The New Orders Index increased to 50.9 percent, 0.5 percentage point higher than the seasonally adjusted reading of 50.4 registered in December. The Employment Index increased 0.8 percentage point to 56.4 percent from the December seasonally adjusted reading of 55.6 percent and indicates growth in employment for the 25th consecutive month and at a faster rate. The Prices Index increased 2.4 percentage points from the December seasonally adjusted reading of 54.7 percent to 57.1 percent, indicating prices increased at a faster rate in January when compared to December. According to the NMI®, eleven non-manufacturing industries reported growth in January. The majority of respondents’ comments reflect an improvement in business conditions. Some of the respondents indicate that weather conditions have impacted their business. There remains a bit of uncertainty about the overall economy for some of the survey respondents; however, the majority feel positive about continued economic growth.

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

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

Related Articles

All Articles on Institute of Supply Management Surveys

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