Written by Steven Hansen
The ISM non-manufacturing (aka ISM Services) index continued its growth cycle but falling significantly. On the other hand, the Markit PMI Services Index significantly declined and is in recession territory.
Analyst Opinion of the ISM and Markit Services Survey
The Markit survey is in territory associated with recessions. This month I would ignore the ISM survey which continues to be too optimistic.
From Econoday:
| Consensus Range | Consensus | Actual | |
| Markit Services | 38.9 to 43.5 | 39.1 | 39.8 |
| ISM Services | 34.8 to 47.0 | 43.0 | 52.5 |
From Markit:
Business activity declines steeply amid COVID-19 pandemic
- Output and new business fall at fastest rates in series history
- Employment contracts at joint-sharpest pace since December 2009
- Business confidence strengthens, but remains relatively mutedBusiness confidence drops to series low
- U.S. service providers registered the steepest decline in business activity since data collection began ten-and-a-half years ago in March as the coronavirus disease 2019 (COVID-19) pandemic led to business closures and sharply reduced client demand for services from both businesses and households. Similarly, public health measures to tackle the spread of the virus across key export destinations caused a marked fall in new export orders. Consequently, firms were reportedly forced to implement hiring freezes and make redundancies, with business expectations over the coming 12 months slumping to a record low due to uncertainty surrounding the longevity of the COVID-19 outbreak. Meanwhile, lower demand for inputs and efforts to retain clients led to decreases in input costs and selling prices, respectively.
- The seasonally adjusted final IHS Markit US Services Business Activity Index registered 39.8 at the end of the first quarter, which, although revised up from the ‘flash’ figure of 39.1, was down sharply from 49.4 in February. The latest data, collected between 12th and 27th March, indicated the quickest decline in output since data collection began in October 2009. Business activity fell markedly following a sharp reduction in new orders, largely stemming from the outbreak of COVID-19. Concurrently, new orders received by service providers contracted at the sharpest rate since the survey began, as customer and business closures led to client cancellations. The marked downturn in total sales was mirrored in the trend for new export orders, which fell at a substantial pace as foreign client demand faded amid emergency lockdowns.
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From the ISM Services report:
Economic activity in the non-manufacturing sector grew in March for the 122nd 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 52.5 percent, 4.8 percentage points lower than the February reading of 57.3 percent. This represents continued growth in the non-manufacturing sector, at a slower rate. The Non-Manufacturing Business Activity Index decreased to 48 percent, 9.8 percentage points lower than the February reading of 57.8 percent, reflecting contraction for the first time since July 2009, when the index registered 47.2 percent. The New Orders Index registered 52.9 percent, 10.2 percentage points below the reading of 63.1 percent in February. The Employment Index decreased 8.6 percentage points to 47 percent from the February reading of 55.6 percent.
“The Supplier Deliveries Index registered 62.1 percent, up 9.7 percentage points from the February reading of 52.4 percent, and limited the decrease in the composite NMI®. The Supplier Deliveries Index is one of four equally weighted subindexes that directly factor into the NMI®, along with Business Activity, New Orders and Employment. Supplier Deliveries is the only ISM® Report On Business® index that is inversed; a reading of above 50 percent indicates slower deliveries, which is typical as the economy improves and customer demand increases. However, the high percentage-point increase in March — the largest monthly change since an 18.5-point decrease in September 1997 — was primarily a product of supply problems related to the coronavirus (COVID-19).
“The Prices Index of 50 percent is 0.8 percentage point lower than the February reading of 50.8 percent, indicating that prices were unchanged in March. According to the NMI®, nine non-manufacturing industries reported growth. The non-manufacturing sector composite index indicates growth in March; however, the extreme slowing of supplier deliveries weighted heavily in the calculation. The other three subindexes that contribute to the NMI® contracted strongly in March. Respondents are concerned about the coronavirus impact on the supply chain, operational capacity, human resources and finances, as well as the ramifications for the overall economy.”
INDUSTRY PERFORMANCE
The nine non-manufacturing industries reporting growth in March — listed in order — are: Health Care & Social Assistance; Real Estate, Rental & Leasing; Public Administration; Utilities; Finance & Insurance; Construction; Management of Companies & Support Services; Wholesale Trade; and Information. The seven industries reporting a decrease in March — listed in order — are: Arts, Entertainment & Recreation; Transportation & Warehousing; Professional, Scientific & Technical Services; Mining; Other Services; Retail Trade; and Educational Services.
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 – and the Business Activity index is in recession territory.
This index and its associated sub-indices are fairly volatile.
- The Business Activity sub-index declined 9.8 points and now is at 48.0
- The New Orders Index improved 10.2 points and is currently at 52.9
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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