June 2014 ISM Services Index Softens Marginally

Written by Steven Hansen

The June 2014 ISM non-manufacturing (aka services) index continues its growth cycle, but declined marginally from 56.3 to 56.0 (above 50 signals expansion). Important internals continued to show strong expansion – but the direction of movements were mixed.

This was within the range of market forecasts of 54.5 to 58.5 (consensus 56.2).

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 weakened and the New Orders Index 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 lost 4.6 points and now is at 57.5.

ISM Services – Business Activity Sub-Index

The New Orders Index gained 0.7 and is currently at 61.2.

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 June for the 53rd consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 56 percent in June, 0.3 percentage point lower than the May reading of 56.3 percent. This represents continued growth at a slightly slower rate in the non-manufacturing sector. The Non-Manufacturing Business Activity Index decreased to 57.5 percent, which is 4.6 percentage points lower than the May reading of 62.1 percent, reflecting growth for the 59th consecutive month at a slower rate. The New Orders Index registered 61.2 percent, 0.7 percentage point higher than the reading of 60.5 percent registered in May. The Employment Index increased 2 percentage points to 54.4 percent from the May reading of 52.4 percent and indicates growth for the fourth consecutive month and at a faster rate. The Prices Index decreased 0.2 percentage point from the May reading of 61.4 percent to 61.2 percent, indicating prices increased at a slightly slower rate in June when compared to May. According to the NMI®, 14 non-manufacturing industries reported growth in June. Respondents’ comments vary by industry and company; however, the majority indicate that steady economic growth is continuing.

INDUSTRY PERFORMANCE – The 14 non-manufacturing industries reporting growth in June — listed in order — are: Construction; Real Estate, Rental & Leasing; Utilities; Management of Companies & Support Services; Arts, Entertainment & Recreation; Agriculture, Forestry, Fishing & Hunting; Information; Public Administration; Retail Trade; Transportation & Warehousing; Professional, Scientific & Technical Services; Wholesale Trade; Finance & Insurance; and Other Services. The four industries reporting contraction in June are: Educational Services; Mining; Accommodation & Food Services; and Health Care & Social Assistance.

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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