January 2019 ISM and Markit Services Indices Remain In Growth

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continued its growth cycle but declined. Markit PMI Services Index insignificantly declined and remains in growth territory.

From Econoday:

From Markit:

New business growth weakest since October 2017

• New orders expand at solid, albeit slower rate
• Business activity growth softens to three-month low
• Business confidence dips to lowest in a year
• The U.S. service sector signalled a solid expansion in business activity in December, albeit the slowest for three-months. The rate of growth in new business eased to a 14-month low, but the pace of job creation picked up. Subsequently, panellists registered a renewed fall in backlogs as pressure on capacity decreased. Concerns surrounding the longevity of the upturn in new business led to the weakest expected rise in future output since December 2017.
• Meanwhile, input prices rose at the slowest rate since August. In line with a softer rise in cost burdens and less robust client demand, output charges increased at the weakest pace since December 2017. The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 54.4 in December, down from 54.7 in November, but up from the earlier reported flash figure of 53.6. The upturn in business activity was driven by a further rise in new orders and increased repeat business. Although down on growth rates seen earlier in the year, the upturn was solid overall. The final quarterly average of 2018 matched that seen in the third quarter at 54.7.

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From the ISM Services report:

Economic activity in the non-manufacturing sector grew in December for the 107th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The report was issued today by Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee: “The NMI® registered 57.6 percent, which is 3.1 percentage points lower than the November reading of 60.7 percent. This represents continued growth in the non-manufacturing sector, at a slower rate. The Non-Manufacturing Business Activity Index decreased to 59.9 percent, 5.3 percentage points lower than the November reading of 65.2 percent, reflecting growth for the 113th consecutive month, at a slower rate in December. The New Orders Index registered 62.7 percent, 0.2 percentage point higher than the reading of 62.5 percent in November. The Employment Index decreased 2.1 percentage points in December to 56.3 percent from the November reading of 58.4 percent. The Prices Index decreased 6.7 percentage points from the November reading of 64.3 percent to 57.6 percent, indicating that prices increased in December for the 34th consecutive month. According to the NMI®, 16 non-manufacturing industries reported growth. The non-manufacturing sector’s growth rate cooled off in December. Respondents indicate that there still is concern about tariffs, despite the hold on increases by the U.S. and China. Also, comments reflect that capacity constraints have lessened; however, employment-resource challenges remain. Respondents are mostly optimistic about overall business conditions.”

The 16 non-manufacturing industries reporting growth in December — listed in order — are: Arts, Entertainment & Recreation; Transportation & Warehousing; Health Care & Social Assistance; Retail Trade; Information; Utilities; Accommodation & Food Services; Professional, Scientific & Technical Services; Public Administration; Other Services; Finance & Insurance; Wholesale Trade; Agriculture, Forestry, Fishing & Hunting; Educational Services; Construction; and Management of Companies & Support Services. The only industry reporting a decrease in December is Mining.

ISM Services Index

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There are two sub-indexes in the ISM Services which have good correlations to the economy – the Business Activity Index and the New Orders Index – both have good track records in spotting an incipient recession – both remaining in territories associated with expansion.

This index and its associated sub-indices are fairly volatile.

• The Business Activity sub-index declined 5.3 points and now is at 59.9
• The New Orders Index improved 0.2 and is currently at 62.7

The complete ISM manufacturing and non-manufacturing survey table is below.

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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.

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.

From Econoday:

The ISM non-manufacturing survey does not compile a composite index like its manufacturing cousin. The business activity index, which is actually akin to the production index in the manufacturing survey, is widely followed as the key figure from this survey.

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