Written by Steven Hansen
The ISM and the Markit PMI Services Index improved – but one is in contraction and the other well into expansion.
Analyst Opinion of the ISM and Markit Services Survey
The ISM services survey is in a territory associated with a relatively strong expansion whilst the Markit Services index is still showing contraction. Just looking around tells you that the Markit Services is likely in the correct value. It is obvious the ISM survey did not include bars and restaurants.
From Econoday:
| Consensus Range | Consensus | Actual | |
| Markit Services | 42.5 to 46.7 | 46.7 | 47.9 |
| ISM Services | 46.0 to 51.2 | 49.0 | 57.1 |
From Markit:
Business activity slumps further amid COVID-19 pandemic, but speed of downturn eases
- Softest fall in output since February amid strengthening demand
- Renewed increases in cost burdens and selling prices
- Business confidence improve
- June PMITM data signalled a notably softer rate of contraction in business activity across the U.S. service sector as many companies began to reopen following the easing of coronavirus disease 2019 (COVID-19) restrictions. The loosening of lockdown measures also led to the broad stabilization of new orders, while export sales rose for the first time so far in 2020. As a result, the rate of job shedding softened markedly as some firms highlighted the hiring of new employees to help fulfil new business inflows. Excess capacity also eased as backlogs fell only fractionally. Although business confidence was historically muted, it signalled renewed optimism as hopes of stronger demand drove sentiment higher.
- Meanwhile, inflationary pressure returned as both input prices and output charges rose for the first time since February, with both increasing at solid rates. The seasonally adjusted final IHS Markit US Services Business Activity Index registered 47.9 at the end of the second quarter, up significantly from 37.5 in May and above the earlier released ‘flash’ figure of 46.7. The marked easing in the rate of output contraction was in part linked to the reopening of service providers and the gradual return of customer demand. The pace of decline was the slowest in the current four-month sequence of decline.
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From the ISM Services report:
Economic activity in the non-manufacturing sector grew in June after two consecutive months of contraction, 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 57.1 percent, 11.7 percentage points higher than the May reading of 45.4 percent. This reading represents growth in the non-manufacturing sector after a two-month period of contraction preceded by 122 straight months of expansion. This is the largest single-month percentage-point increase in the NMI® since its debut in 1997. (In April, the index suffered its biggest one-month decrease, a 10.7-percent drop.) The Business Activity Index registered 66 percent, up 25 percentage points from May’s figure of 41 percent. The New Orders Index registered 61.6 percent; 19.7 percentage points higher than the reading of 41.9 percent in May. The Employment Index increased to 43.1 percent; 11.3 percentage points higher than the May reading of 31.8 percent.
“The Supplier Deliveries Index registered at 57.5 percent, down 9.5 percentage points from May’s reading of 67 percent. 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 index readings the previous three months were primarily a product of supply problems related to the coronavirus (COVID-19) pandemic. The Supplier Deliveries Index now more closely correlates to current supply and demand.
“The Prices Index figure of 62.4 percent is 6.8 percentage points higher than the May reading of 55.6 percent, indicating that prices increased in June. According to the NMI®, 14 non-manufacturing industries reported growth. The non-manufacturing composite index indicated growth after two consecutive months of contraction. The sector’s previous period of contraction was for two months in 2009: November (with an NMI® of 49.5 percent) and December (with an NMI® of 49.7 percent). Respondents remain concerned about the coronavirus and the more recent civil unrest; however, they are cautiously optimistic about business conditions and the economy as businesses are beginning to reopen,” says Nieves.
INDUSTRY PERFORMANCE
The 14 non-manufacturing industries reporting growth in June — listed in order — are: Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; Wholesale Trade; Real Estate, Rental & Leasing; Health Care & Social Assistance; Construction; Retail Trade; Utilities; Transportation & Warehousing; Arts, Entertainment & Recreation; Information; Finance & Insurance; Public Administration; and Professional, Scientific & Technical Services. The three industries reporting a decrease in June are: Mining; Other Services; and Management of Companies & Support 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.
This index and its associated sub-indices are fairly volatile.
- The Business Activity sub-index improved 6.6 points and now is at 57.2
- The New Orders Index declined 2.2 points and is currently at 54.9
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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