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July 2014 ISM Services Index Above Expectations

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August 5, 2014
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Written by Steven Hansen

The July 2014 ISM non-manufacturing (aka services) index continues its growth cycle, and improved from 56.0 to 58.7 (above 50 signals expansion). Important internals were even stronger.

This was above the range of market forecasts of 55.0 to 57.5 (consensus 56.5).

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 strengthened and the New Orders Index also improved – with both remaining 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 4.9 points and now is at 62.4.

ISM Services – Business Activity Sub-Index

The New Orders Index gained 3.7 and is currently at 64.9.

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 July for the 54th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 58.7 percent in July, 2.7 percentage points higher than the June reading of 56 percent. This represents continued growth in the Non-Manufacturing sector. This month’s NMI® is the highest reading for the index since its inception in January 2008. The Non-Manufacturing Business Activity Index increased to 62.4 percent, which is 4.9 percentage points higher than the June reading of 57.5 percent, reflecting growth for the 60th consecutive month at a faster rate. This is the highest reading for the index since February 2011 when the index registered 63.3 percent. The New Orders Index registered 64.9 percent, 3.7 percentage points higher than the reading of 61.2 percent registered in June. This represents the highest reading for the New Orders Index since August 2005 when it registered 65.3 percent. The Employment Index increased 1.6 percentage points to 56 percent from the June reading of 54.4 percent and indicates growth for the fifth consecutive month. The Prices Index decreased 0.3 percentage point from the June reading of 61.2 percent to 60.9 percent, indicating prices increased at a slightly slower rate in July when compared to June. According to the NMI®, 16 non-manufacturing industries reported growth in July. Respondents’ comments indicate that stabilization and/or improving market conditions have positively affected the majority of the respective industries and businesses.

INDUSTRY PERFORMANCE – The 16 non-manufacturing industries reporting growth in July — listed in order — are: Construction; Educational Services; Public Administration; Real Estate, Rental & Leasing; Arts, Entertainment & Recreation; Retail Trade; Accommodation & Food Services; Professional, Scientific & Technical Services; Management of Companies & Support Services; Finance & Insurance; Mining; Wholesale Trade; Health Care & Social Assistance; Transportation & Warehousing; Information; and Other Services. The only industry reporting contraction in July is Utilities.

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 Posts:

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