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ISM Non-Manufacturing: Improved Conditions?

The Economic activity in the non-manufacturing sector grew in February for the 15th consecutive month according to the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM Report on Business®.

The non-manufacturing survey for the Institute For Supply Management is a relatively new survey – and no pundit yet has figured out to what it relates.  Although anything going up is good, Econintersect has tried to find something it tracks.

With 90% of the employment in the service sector, you would think that if conditions were improving, it should track private sector non-farm payrolls.  You would think that with the ADP employment data released earlier this week (analysis here) showing so much improvement in the service sector of the economy, that the ISM non-Manufacturing Survey improvement and employment should go hand-in-hand.

Nope – no correlation to employment.

But there is a loose correlation to retail sales.

The headlines from the press release:

The NMI registered 59.7 percent in February, 0.3 percentage point higher than the 59.4 percent registered in January, and indicating continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index increased 2.3 percentage points to 66.9 percent, reflecting growth for the 19th consecutive month and at a faster rate than in January. The New Orders Index decreased 0.5 percentage point to 64.4 percent, and the Employment Index increased 1.1 percentage points to 55.6 percent, indicating growth in employment for the sixth consecutive month and at a faster rate. The Prices Index increased 1.2 percentage points to 73.3 percent, indicating that prices increased at a faster rate in February. According to the NMI, 13 non-manufacturing industries reported growth in February. Respondents’ comments overall are mostly positive about business conditions and the direction of the economy.”

The 13 industries reporting growth in February based on the NMI composite index — listed in order — are: Real Estate, Rental & Leasing; Accommodation & Food Services; Mining; Utilities; Professional, Scientific & Technical Services; Educational Services; Transportation & Warehousing; Finance & Insurance; Other Services; Public Administration; Wholesale Trade; Management of Companies & Support Services; and Retail Trade. The five industries reporting contraction in February are: Agriculture, Forestry, Fishing & Hunting; Construction; Health Care & Social Assistance; Arts, Entertainment & Recreation; and Information.

WHAT RESPONDENTS ARE SAYING …
  • “Business started picking up late last year and appears to be sustaining that level through the beginning of 2011.” (Professional, Scientific & Technical Services)
  • “Business environment is generally improving.” (Management of Companies & Support Services)
  • “We are seeing strength in our business both from the perspective of new business and expansion with our existing customers.” (Finance & Insurance)
  • “Strong demand; capacity crunch all around.” (Transportation & Warehousing)
  • “Major uptick in business activities.” (Accommodation & Food Services)
  • “Commodities are once again putting significant pressure on prices and capacity.” (Retail Trade)

Econintersect also believes the USA economy is expanding (analysis here for March 2011).  I have a hard time putting much faith in surveys – they are a quantification of opinion.  In the case of ISM surveys, they are improperly weighted.

Econintersect earlier this week analyzed the ISM Manufacturing survey which improved also (analysis here).  Hard data has shown that inventories were expanding in January.  Perhaps variations in the data from month-to-month can be attributed to the survey respondents having a good or bad day.

Related Articles

March 2011 Economic Forecast:  GDP is Disconnected from the Real Economy  by Steven Hansen

ADP and Challenger:  How Will Rising Oil Prices Affect Employment?  by Steven Hansen

ISM Manufacturing Survey Implies Manufacturing Improvement Continues by Steven Hansen

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