Written by Steven Hansen
The ISM and the Markit PMI Services Index improved but are in recession territory.
Analyst Opinion of the ISM and Markit Services Survey
Both the ISM and Markit surveys are in territory associated with recessions. Thank the coronavirus.
From Econoday:
| Consensus Range | Consensus | Actual | |
| Markit Services | 29.5 to 37.4 | 36.9 | 37.5 |
| ISM Services | 43.5 to 46.5 | 44.0 | 45.4 |
From Markit:
Business activity slumps further amid COVID-19 pandemic, but speed of downturn eases
- Output and new business drops substantially as COVID-19 crisis continues
- Business confidence improves but remains negative
- Input costs and output charges fall further
- U.S. service providers indicated a further significant, albeit softer, contraction in business activity in May, as the impact of the coronavirus disease 2019 (COVID-19) continued to dampen client demand. At the same time, new order inflows declined at a slower rate than in April, despite domestic and foreign demand remaining subdued. Consequently, companies cut jobs at a considerable pace, and one that was only slightly slower than April’s recent record. The reduction in employment partially stemmed from pessimism among firms towards the outlook for activity over the next year, as extreme levels of business uncertainty weighed on confidence. In an effort to boost sales, firms reduced their selling prices further. The drop in output charges was aided by lower cost burdens.
- The seasonally adjusted final IHS Markit US Services Business Activity Index registered 37.5 in May, up from April’s record low of 26.7 and slightly higher than the ‘flash’ figure of 36.9. The rate of reduction in activity softened notably amid some reports of businesses returning to work, but was nonetheless the second-sharpest since data collection began in October 2009. The decrease in service sector output was widely linked to emergency public health measures introduced to stem the spread. Stay-at-home measures and social distancing presented challenges to business reopening, especially those who focus on customer-facing services.
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From the ISM Services report:
Economic activity in the non-manufacturing sector contracted in May for the second 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 45.4 percent, 3.6 percentage points higher than the April reading of 41.8 percent. This reading represents contraction in the non-manufacturing sector for the second consecutive month, following a 122-month period of expansion. The Business Activity Index increased 15 percentage points from April’s figure, registering 41 percent. The New Orders Index registered 41.9 percent; 9 percentage points higher than the reading of 32.9 percent in April. The Employment Index increased to 31.8 percent; 1.8 percentage points higher than the April reading of 30 percent.
“The Supplier Deliveries Index registered at 67 percent, down 11.3 percentage points from April’s all-time-high reading of 78.3 percent, which elevated 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. The higher readings for supplier deliveries the past three months are primarily a product of supply problems related to the coronavirus (COVID-19) pandemic.
“The Prices Index figure of 55.6 percent is 0.5 percentage point higher than the April reading of 55.1 percent, indicating that prices increased in May. According to the NMI®, four non-manufacturing industries reported growth. The non-manufacturing composite index indicated contraction for a second consecutive time. The sector’s previous period of contraction was for two months in 2009: November (with an NMI® of 49.5 percent) and December (49.7 percent). Respondents remain concerned about the ongoing impact of the coronavirus. Additionally, many of the respondents’ respective companies are hoping and/or planning for a resumption of business,” says Nieves.
INDUSTRY PERFORMANCE
The four non-manufacturing industries reporting growth in May are: Agriculture, Forestry, Fishing & Hunting; Finance & Insurance; Public Administration; and Information. The 14 industries reporting a decrease in May — listed in order — are: Mining; Arts, Entertainment & Recreation; Other Services; Construction; Educational Services; Professional, Scientific & Technical Services; Utilities; Wholesale Trade; Accommodation & Food Services; Management of Companies & Support Services; Real Estate, Rental & Leasing; Transportation & Warehousing; Health Care & Social Assistance; and Retail Trade.
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 improved 15 points and now is at 41.0
- The New Orders Index improved 9.0 points and is currently at 41.9.9
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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