Written by Steven Hansen
The ISM and the Markit PMI Services Index improved with the Markit PMI showing no growth (and no contraction either) and the ISM 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 showing no growth. 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 | 49.0 to 49.6 | 49.6 | 50.0 |
ISM Services | 53.5 to 57.5 | 55.0 | 58.1 |
From Markit:
Business activity stabilizes but demand conditions deteriorate
- Reopening of firms leads to rise in Business Activity Index from June
- New orders continue to fall slightly amid subdued demand
- Input cost pressures intensify
- July PMI data signalled a stabilization in business activity across the U.S. service sector as businesses continued to reopen following coronavirus disease 2019 (COVID-19) lockdowns in prior months. New orders declined at a slightly quicker rate, however, as domestic and foreign client demand remained muted, which was often attributed to ongoing virus-related restrictions. Nonetheless, operational restrictions led to constraints on capacity, with firms increasing their workforce numbers to process unfinished business. At the same time, output expectations improved to the strongest since March 2019 amid hopes of an end to lockdown measures over the longer term. On the price front, input costs and output charges rose at sharper rates as there were some reports of PPE-related costs rising, and supplier price hikes were partially passed on to customers.
- The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 50.0 at the start of the third quarter, up from 47.9 in June and improving on the ‘flash’ estimate of 49.6, to signal a stabilization in service sector business activity. The latest data brought to an end a five-month sequence of contraction, with the Business Activity index rising for a third successive month from April’s record low (26.7). Although some firms remained closed or noted weak client demand and disrupted working practices due to the pandemic, others stated that the resumption of business had boosted output. In contrast, new business continued to decrease in July. Service providers registered a marginal rate of decline which was slightly greater than seen in June.
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From the ISM Services report:
Economic activity in the Services sector (formally non-manufacturing sector) grew in July for the second month in a row, say the nation’s purchasing and supply executives in the latest Services 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®) Services Business Survey Committee: “The Services PMI™ registered 58.1 percent, 1 percentage point higher than the June reading of 57.1 percent. This reading represents growth in the services sector for the second straight month after contraction in April and May, preceded by a 122-month period of expansion.
“The Supplier Deliveries Index registered 55.2 percent, down 2.3 percentage points from June’s reading of 57.5 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 readings for supplier deliveries in the three months prior to June were primarily a product of supply problems related to the coronavirus (COVID-19) pandemic. Supplier deliveries are now more closely correlating to the current supply and demand.
“The Prices Index figure of 57.6 percent is 4.8 percentage points lower than the June reading of 62.4 percent, indicating that prices increased in July at a slower rate. According to the Services PMI™, 15 services industries reported growth. The composite index indicated growth for the second consecutive month after two months of contraction. The sector’s previous period of contraction was for two months in 2009: November (with a Services PMI™ of 49.5 percent) and December (with a Services PMI™ of 49.7 percent). Respondents remain concerned about the pandemic; however, they are mostly optimistic about business conditions and the economy as businesses continue to reopen. Sentiment varies across industries, as they are impacted differently,” says Nieves.
INDUSTRY PERFORMANCE
The 15 services industries reporting growth in July — listed in order — are: Arts, Entertainment & Recreation; Health Care & Social Assistance; Retail Trade; Transportation & Warehousing; Wholesale Trade; Educational Services; Construction; Utilities; Public Administration; Finance & Insurance; Management of Companies & Support Services; Real Estate, Rental & Leasing; Agriculture, Forestry, Fishing & Hunting; Accommodation & Food Services; and Information. The three industries reporting a decrease in July are: Other Services; Mining; and Professional, Scientific & Technical 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 1.2 points and now is at 67.2
- The New Orders Index improved 6.1 points and is currently at 67.7
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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