January 2020 ISM and Markit Services Continue To Moderately Improve

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index and the Markit PMI Services Index continued their growth cycle with both indices improving modestly.

From Econoday:

From Markit:

Business activity growth accelerates to 10-month high at start of 2020

• Faster upturn in output amid sustained rise in new orders
• Rate of job creation quickest since last July
• Business confidence remains subdued
• The opening month of 2020 signalled a solid expansion in business activity across the U.S. service sector. Output growth was supported by another modest increase in client demand, albeit historically soft and weighed on by a renewed contraction in new export sales. Nonetheless, the rate of job creation quickened in an effort to alleviate pressure on capacity. Firms were not, however, more confident about an increase in business activity over the coming year, as optimism remained historically muted and eased since December. On the price front, cost pressures strengthened amid supplier price hikes, but output charges rose only marginally as firms sought to attract new clients.
• The seasonally adjusted final IHS Markit US Services Business Activity Index registered 53.4 in January, up from 52.8 in December and revised up slightly from the flash figure of 53.2. The latest index reading signalled a solid expansion in output at the start of 2020 and was reportedly supported by greater marketing activity and a sustained increase in new business. Moreover, the rate of expansion quickened to a ten-month high, albeit still running below the long-run series trend.

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From the ISM Services report:

Economic activity in the non-manufacturing sector grew in January for the 120th 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 55.5 percent, which is 0.6 percentage point higher than the seasonally adjusted December reading of 54.9 percent. This represents continued growth in the non-manufacturing sector, at a slightly faster rate. The Non-Manufacturing Business Activity Index increased to 60.9 percent, 3.9 percentage points higher than the seasonally adjusted December reading of 57.0 percent, reflecting growth for the 126th consecutive month. The New Orders Index registered 56.2 percent; 0.9 percentage point higher than the seasonally adjusted reading of 55.3 percent in December. The Employment Index decreased 1.7 percentage points in January to 53.1 percent from the seasonally adjusted December reading of 54.8 percent. The Prices Index of 55.5 is 3.8 percentage points lower than the seasonally adjusted December reading of 59.3 percent, indicating that prices increased in January for the 32nd consecutive month. According to the NMI®, 12 non-manufacturing industries reported growth. The non-manufacturing sector exhibited continued growth in January. The respondents remain mostly positive about business conditions and the overall economy. Respondents continue to have difficulty with labor resources.”

The 12 non-manufacturing industries reporting growth in January — listed in order — are: Agriculture, Forestry, Fishing & Hunting; Management of Companies & Support Services; Health Care & Social Assistance; Educational Services; Utilities; Accommodation & Food Services; Finance & Insurance; Retail Trade; Construction; Public Administration; Information; and Professional, Scientific & Technical Services. The six industries reporting a decrease in January — listed in order — are: Transportation & Warehousing; Wholesale Trade; Other Services; Arts, Entertainment & Recreation; Mining; and Real Estate, Rental & Leasing.

ISM Services Index

source: tradingeconomics.com

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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 improved 3.9 points and now is at 60.9
• The New Orders Index improved 0.9 points and is currently at 56.2

The complete ISM manufacturing and non-manufacturing survey table are 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 the 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 a 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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