March 2014 ISM Services Index Within Expectations

Written by Steven Hansen

The March 2014 ISM non-manufacturing (aka services) index continues its growth cycle, and improved from 51.6 to 53.1 (above 50 signals expansion). Important internals were mixed but in expansion territory.

This was within the range of market forecasts of 52.0 to 55.0 (consensus 53.3).

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 improved – but both remained 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 1.2 points (lost 1.7 points in the previous reporting month) and now is at 53.4.

ISM Services – Business Activity Sub-Index

The New Orders Index gained 2.1 and is currently at 53.4.

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 March for the 50th consecutive month, say the nation’s purchasing and supply executives in the latest Non-Manufacturing ISM® Report On Business®.

The NMI® registered 53.1 percent in March, 1.5 percentage points higher than February’s reading of 51.6 percent. The Non-Manufacturing Business Activity Index decreased to 53.4 percent, which is 1.2 percentage points lower than the reading of 54.6 percent reported in February, reflecting growth for the 56th consecutive month but at a slower rate. The New Orders Index registered 53.4 percent, 2.1 percentage points higher than the reading of 51.3 percent registered in February. The Employment Index increased 6.1 percentage points to 53.6 percent from the February reading of 47.5 percent and indicates substantial growth after one month of contraction. The Prices Index increased 4.6 percentage points from the February reading of 53.7 percent to 58.3 percent, indicating prices increased at a faster rate in March when compared to February. According to the NMI®, 13 non-manufacturing industries reported growth in March. Despite the affects of weather on many of the respective businesses, the majority of respondents indicate that business conditions are improving. The respondents also project better business activity and economic conditions as weather conditions continue to improve.

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

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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