February 2020 ISM and Markit Services Surveys Disagree

Written by Steven Hansen

The ISM non-manufacturing (aka ISM Services) index continued their growth cycle improving significantly. On the other hand, the Markit PMI Services Index significantly declined and now is in contraction.

From Econoday:

From Markit:

Fastest contraction in business activity since October 2013

• Marginal fall in output as demand conditions weaken
• Slower rise in employment amid reduced pressure on capacity
• Business confidence strengthens, but remains relatively muted
• February data signalled the first contraction of U.S. service sector business activity for four years. The decrease in output stemmed from only a fractional rise in client demand and a further contraction in new business from abroad as customers held back from placing orders amid global economic uncertainty and the coronavirus outbreak. As a result, business confidence remained historically subdued and employment growth slipped to the weakest since last November. Efforts to attract and retain clients and a softer pace of input price inflation meanwhile led to a slower increase in output charges. The rate of selling price inflation eased to a threemonth low
• The seasonally adjusted final IHS Markit US Services Business Activity Index registered 49.4 in February, unchanged from the ‘flash’ figure, but notably down from 53.4 seen at the start of the year. The contraction in output was only marginal overall, but was nonetheless the fastest in over six years. Firms attributed the decline to less robust domestic demand conditions and a further fall in export sales. In line with a slower expansion in client demand, new business rose at only a fractional rate that was the softest in the current four month sequence of growth.

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From the ISM Services report:

Economic activity in the non-manufacturing sector grew in February for the 121st 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 57.3 percent, which is 1.8 percentage points higher than the January reading of 55.5 percent. This represents continued growth in the non-manufacturing sector, at a faster rate. The Non-Manufacturing Business Activity Index decreased to 57.8 percent, 3.1 percentage points lower than the January reading of 60.9 percent, reflecting growth for the 127th consecutive month. The New Orders Index registered 63.1 percent; 6.9 percentage points higher than the reading of 56.2 percent in January. The Employment Index increased 2.5 percentage points in February to 55.6 percent from the January reading of 53.1 percent. The Prices Index reading of 50.8 is 4.7 percentage points lower than the January’s 55.5 percent, indicating that prices increased in February for the 33rd consecutive month. According to the NMI®, 16 non-manufacturing industries reported growth. The non-manufacturing sector reflected continued growth in February. Most respondents are concerned about the coronavirus and its supply chain impact. They also continue to have difficulty with labor resources. They do remain positive about business conditions and the overall economy.”

INDUSTRY PERFORMANCE

The 16 non-manufacturing industries reporting growth in February — listed in order — are: Accommodation & Food Services; Management of Companies & Support Services; Mining; Finance & Insurance; Real Estate, Rental & Leasing; Other Services; Construction; Health Care & Social Assistance; Public Administration; Wholesale Trade; Transportation & Warehousing; Educational Services; Professional, Scientific & Technical Services; Utilities; Information; and Retail Trade. The two industries reporting a decrease in February are: Arts, Entertainment & Recreation; and Agriculture, Forestry, Fishing & Hunting.

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 declined 3.1 points and now is at 57.8
• The New Orders Index improved 6.9 points and is currently at 63.1

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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