Written by Steven Hansen
The ISM non-manufacturing (aka ISM Services) index continues its growth cycle, but declined moderately from 59.3 to 56.2 (above 50 signals expansion). Important internals likewise contracted.
This was slightly below the range of market forecasts of 57.0 to 59.0 (consensus 58.0).
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. The Business Activity Index declined and the New Orders Index declined – with both remaining in territories associated with moderate expansion.
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 declined 7.2 points and now is at 57.2.
ISM Services – Business Activity Sub-Index
The New Orders Index declined 2.5 and is currently at 58.9.
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 December for the 59th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.
The NMI® registered 56.2 percent in December, 3.1 percentage points lower than the November reading of 59.3 percent. This represents continued growth in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.2 percent, which is 7.2 percentage points lower than the November reading of 64.4 percent, reflecting growth for the 65th consecutive month at a slower rate. The New Orders Index registered 58.9 percent, 2.5 percentage points lower than the reading of 61.4 percent registered in November. The Employment Index decreased 0.7 percentage point to 56 percent from the November reading of 56.7 percent and indicates growth for the tenth consecutive month. The Prices Index decreased 4.9 percentage points from the November reading of 54.4 percent to 49.5 percent, indicating prices contracted in December when compared to November. According to the NMI®, 12 non-manufacturing industries reported growth in December. Comments from respondents are mostly positive about business conditions and the overall economy for year-end.
INDUSTRY PERFORMANCE –The 12 non-manufacturing industries reporting growth in December — listed in order — are: Retail Trade; Accommodation & Food Services; Information; Management of Companies & Support Services; Professional, Scientific & Technical Services; Agriculture, Forestry, Fishing & Hunting; Health Care & Social Assistance; Wholesale Trade; Construction; Utilities; Finance & Insurance; and Public Administration. The five industries reporting contraction in December are: Arts, Entertainment & Recreation; Mining; Educational Services; Other Services; and Transportation & Warehousing.
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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